Why Treasury Inflation-Protected Securities?

A little story. Back in 1999 I was at a cocktail party, and of course, the conversation drifted toward the red-hot stock market, as  it always did in 1999. What were you buying? Cisco? AOL? Something-or-other.com?

I said, “I’ve been looking at TIPS, Treasury Inflation-Protected Securites.”

Blank stare from the group standing around me, which included several investment professionals.

“No really, TIPS are paying 4% above inflation and are rock-sold safe. Where can you find another investment like that?”

Blank stare. Oh well, change subject.

I did end up buying TIPS that year, and every year since, directly through TreasuryDirect.gov. Those TIPS I bought in the late 1990s were fantastic investments, returning 3 to 4% above inflation while the stock market had a negative real return over the same time.

Sure, I had money in the stock market, too. But the TIPS investments were sort of ballast for my financial ship. That investment was not going down. That investment was 100% safe.

So today, TIPS are nowhere near as appealing, paying around 0.9% above inflation for a 10-year issue. And this is at a time that the stock market seems pretty fairly valued. And yet TIPS are now massively popular — go figure.

The reason is: The risk of inflation is lurking. If it strikes, and I think it will, your regular bond investments (especially in mutual funds) are going to take a big hit. TIPS mutual funds will also be hit — be sure of that.

My premise is to buy and hold TIPS directly from the Treasury and hold them to maturity. It is not a sexy strategy. But is a safe strategy, if you build a collection of these investments over time. And you invest only up to 25% of your portfolio this way, meaning you keep stock market exposure, and some CDs, bond funds, etc.

The big negative is that you pay tax on the inflation-adjusted principal — I’ll talk about that later.

NOTE: I am just an investor, not a financial professional. I am not selling anything, and my financial advice is just my personal opinion. I am sure many will disagree, and I hope you make your voices heard.


About Tipswatch

Author of Tipswatch.com blog, David Enna is a long-time journalist based in Charlotte, N.C. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website.
This entry was posted in Investing in TIPS and tagged , , . Bookmark the permalink.

3 Responses to Why Treasury Inflation-Protected Securities?

  1. Pingback: New ETF entries … International TIPS funds | Treasury Inflation-Protected Securities

  2. Nick Tholt says:

    Last week I placed an order through Fidelity to buy the 5 year TIPS with the auction date of 04/21/11. I plan on holding to maturity.
    This morning, the pending order was no longer showing in my Fidelity account. When I called, Fidelity informed me that all 5-year TIPS open orders for Fidelity customers have been canceled beccause of the expected high negative yield. Fidelity expects the purchase price to be at 1.02 of par with a nominal interest rate of 0.125% resulting in a negative yield of -0.78%. With the current 5-year bond yield at 2.2%, you would need an inflation rate of approx. 3% to break even on the TIPS. Do you agree with Fidelity’s calculations and do you still plan on making a purchase. Thanks. I’m glad I found your blog.

    • tipswatch says:

      As of Friday, April 15, the 5-year TIPS yield was around -0.264%, putting the break-even rate around 2.4% (the five-year Treasury yield dropped to 2.14% on Friday). But this looks pretty volatile. A TIPS maturing in January 2015 was yielding -0.792, right around what Fidelity was predicting. I am wavering on a purchase. Inflation expectations are suddenly soaring just as this issue is being auctioned, so people are speculating that inflation will overtake a negative yield. It could, but it makes this issue less attractive.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s