TIPS, the suddenly hot topic

Yesterday’s weak auction of a 5-year Treasury Inflation Protected Security, along with last week’s deflationary inflation report, is putting TIPS into the news this week, sometimes in a very negative light. Well, at least it’s nice to see TIPS getting attention.

Remember, just a few weeks ago many of the headlines were strikingly positive, even with TIPS offering pathetically low yields: Why You Should Own TIPS (April 6), State Street Plans Two New TIPS ETFs (March 11), 5 Solid ETF Investment Picks for Retirement (Feb. 28) and TIPS Bond Fund (TIP) Enters Oversold Territory (Jan. 28).

Now we are getting a different view:

‘TIPS are starting to look like Treasurys’ ugly stepsister’: My favorite headline, by far. I love a good headline. This April 18 MarketWatch piece (pre-auction) by Ben Eisen nailed the factors that led to a weak 5-year auction: sagging inflation combined with TIPS’ negative yields to inflation. It’s a bad combination.

“It’s pretty intuitive to think that absence of strong inflationary pressures and a pullback in commodities [would slow] any otherwise perceived demand for TIPs,” said Ian Lyngen, senior rates strategist at CRT Capital Group LLC.

‘Investors Tire of TIPS As Inflation Remains Absent’: Michael Aneiro at Barrons.com (April 17) makes the case that TIPS simply don’t offer enough return to be attractive, and fixed-income investors are moving on.

Investors who have poured money into Treasury inflation-protected securities, or TIPS, however, aren’t really getting the respectable income part of that equation, and they’re getting tired of waiting around for something that isn’t happening …

‘To TIP Or Not To TIP’: Howard Gold at SeekingAlpha.com (April 11) points out that even ultra-cautious economist Robert Shiller thinks stocks might be a better investment than TIPS (for part of your portfolio), given the run-up in TIPS over the last two years.

It’s the negative yield that really bothers Shiller. “Right now, they’re yielding a negative return over the long run, and over the short run it might be even more negative if interest rates go up again,” he said in a recent interview on PBS’s Consuelo Mack WealthTrack.

“Ten-year TIPS are negative substantially, even now to 15 years … which means you’ll get less back in real terms 15 years from now than you have today.”

‘How Much Should Retirees Stake in TIPS?’:  Here’s a thoughtful piece by Christine Benz at Morningstar.com (April 19) that examines the difficulty retirees face in earning income without risk (thank you, Federal Reserve). She remains a fan of TIPS as a hedge against future inflation, especially for retirees, who face heightened risk from inflation.

At first blush it might appear that you’d want all of your fixed-income portfolio in TIPS; that’s the tack embraced by some academics and other investment theorists. After all, if there’s a bond investment that helps offset the corrosive effects of inflation, why would you want to forgo it for one that doesn’t offer that protection? …

The key reason is diversification. … So the answer to the question about how much retirees should hold in TIPS falls somewhere between zero and 100%. But where?

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One Response to TIPS, the suddenly hot topic

  1. Ed says:

    The term ‘expert’ denotes capability, NOT honesty. Read this: “The public be suckered” at
    http://patrick.net/forum/?p=1223928

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