By seadmin
The past few weeks have been quite a wild ride for the equity markets, featuring large swings and a flight to quality. As history has shown us during times of turmoil, investors take cover in the bond market, particularly by buying U.S. Treasuries. One of the best ways to keep your money safe from inflation and losses in the equity market is with Treasury Inflation-Protected Securities, also known as TIPS. These are U.S. government bonds that factor in inflation and adjust your returns accordingly to protect your investment from losing value.
A practical way to invest in TIPS is through the iShares Barclays Treasury Inflation Protected Securities Bond Fund (TIP). This ETF tries to replicate the results from investing in investment-grade TIPS that have at least one year remaining until maturity and have $250 million or more in value outstanding. The fund seeks results that correspond generally to the price and yield performance, before fees and expenses, of the inflation-protected sector of the United States Treasury market, based on the Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L). As of Aug. 15, TIP returned 11.52% so far this year, including $4.00 in dividends, while the equity markets have lagged far behind.
By having TIPS in your portfolio through this ETF, you can reap all the benefits of what might be the world’s safest investment — U.S. Treasuries — while also protecting that investment against inflation. Of course, you may be wondering if inflation really is a threat right now.
Here’s my view. With the zero interest rate policy of the Federal Reserve Bank, the conditions are ripe for inflation once economic growth picks up. Another potential risk is the deteriorating condition of the U.S. government’s credit rating. Many observers expected that the S&P’s downgrade of U.S. credit would increase interest rates. So far, investors seem to have shrugged off the downgrade and still are acting as if U.S. Treasuries are the safest investment in the world. So, we may have a temporary reprieve from inflation. No one knows exactly how long inflation may be held in check.
But historically low interest rates limit the potential returns for long-term investments in Treasuries. If inflation rears up, your potential return from Treasuries will diminish further. Certain market observers also are calling for the Fed to allow inflation to climb as a way to curb some of the current economic problems that the country is facing. One such advocate is Ken Rogoff, a Harvard economist, who suggested in a recent
Financial Times article that central bankers try to achieve “some modest deleveraging through moderate inflation” of 4% to 6% for several years. His opinion received additional attention when it was reported in an Aug. 11
New York Times article. If inflation rises, TIP may be one of the best investments that you could own to protect your money.
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