Most bond funds, and especially Treasury funds, are considered a safe harbor during a time of stock market decline. But mutual funds and ETFs that hold Treasury Inflation-Protected Securities don’t always follow that pattern. The market value of TIPS is also influenced by inflation expectations, which puts a complex spin on their pricing.
If the stock market is going down because of economic fears – as it has been over the last month – then TIPS may underperform other bond funds. The reason: The fear of inflation is dwindling.
This chart shows how the TIPS ETF has fallen behind other benchmark bond funds:
The real safe harbor? I contend that buying Treasury Inflation-Protected Securities directly through TreasuryDirect.gov, or through your broker in a retirement account, is a true safe harbor. This investment will produce a real return over inflation, and it is super safe.
TIPS mutual funds are a bit of a gamble. They have been an excellent investment over the last few years. But the market price of TIPS will go down if the base yield rises, and the base yield is at a historically low rate.