Bond bubble? Jeremy Siegel takes a shot at TIPS

Jeremy Siegel, author of ‘Stocks for the Long Run’ and co-author Jeremy Schwartz took some punches at Treasury Inflation-Protected Securities today in an opinion piece in the Wall Street Journal. They contend that Treasuries – including TIPS -are in a price bubble with yields falling to historic lows.

They specifically call out TIPS for ridicule:

One market that now makes no sense to us is the popular Treasury Inflation Protected Securities (TIPS), where recent yields should be enshrined in Ripley’s “Believe It or Not!” The yield on the benchmark 10-year TIPS turned negative for the first time in history, meaning investors are now lending money to the government with the hope of receiving a sum 10 years from now that is worth less in purchasing power than the dollars they fork over today.

But it is worth pointing out that TIPS buyers – when faced with the option of 10-year Treasuries earning 2.1% – are actually showing logic in preferring TIPS, which have a principal base that grows with inflation. The yield to maturity (before inflation) for a 10-year TIPS is currently -0.002%, meaning that inflation would have to average just 2.102% over 10 years for the TIPS buyer to come out ahead over a 10-year Treasury. Not a bad bet at all.

Still, I personally would not be a buyer of 10-year TIPS at these rates, and I agree with the Jermys that there might be better yield plays out there, at this time of incredibly low Treasury rates. They suggest dividend-paying stocks, and I agree.

However, TIPS play a special role in many portfolios – the rock-solid safe ballast that is protected against inflation. Stocks play a different role in a portfolio, they are more risky and nothing is guaranteed. So it is hard for me to say sell TIPS and buy dividend-paying stocks. I wouldn’t do it.

The Jeremys say:

Some investors who avoid dividend-paying stocks point to the 2007-09 debacle, when the high-dividend financial stocks crashed. But a close look at the data indicates that was a unique event that we see having very little chance of repeating.

They are probably right. But they would have made the same statement before the 2008-09 debacle. Two extra-credit points:

  • The authors could have noted that TIPS were also slapped hard during the 2008 financial crisis, losing almost 14% of their value from early October to late November. But they rebounded fairly quickly.
  • Jeremy Siegel is a senior adviser for WisdomTree,  a company that offers stock-based ETFs, and Jeremy Schwartz is is the director of research at WisdomTree. So their interest is in promoting stocks, obviously, but I don’t doubt their sincerity.

TIPS equal safety. If you holding a portfolio of TIPS to maturity, I say ignore the noise. Continue holding them.You should not be 100% invested in TIPS or any one asset. You should have an allocation in mind, say 25% to 50% in super-safe, boring investments like TIPS.

TIPS in a bubble? I have a hard time thinking ‘bubble’ for something so boring. But if you are holding a TIPS mutual fund, you probably do have downside risk of 10%, at least. Not quite like the tech blowup in 2000, but there is some risk from the recent surge in prices.

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