TIPS Drive Away Biggest Bond Bulls Seeing Inflation
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TIPS pay interest on a principal amount that rises with consumer prices. Their face value is protected against deflation, because the principal can’t fall below par. The benchmark 1.375 10-year Treasury-Inflation Protected Security due January 2020 yields 1.45 percent.
That’s 2.25 percentage points less than Treasuries of similar maturity that don’t provide protection from rising prices. The difference, known as the breakeven rate, reflects the pace of inflation investors expect over the life of the securities. The spread has fallen from the peak this year of 2.49 percentage points on Jan. 11.
I believe that the risks of inflation are so low that TIPS are not a good way to invest some of your investment portfolio. At these low rates I agree TIPS are hardly a wonderful investment but I think it is worth sacrificing some yield to gain if inflation does return in a few years. But the argument for not buying TIPS is also sensible I think.
Related: Bond Yields Show Dramatic Increase in Investor Confidence – Who Will Buy All the USA’s Debt? – Retirement Savings Allocation for 2010 – posts on bonds
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