Young Research & Publishing Inc.

Investment Research Since 1978

Disclosure

  • About Us
    • Contributors
    • Archives
    • Dick Young’s Safe America
    • The Final Richard C. Young’s Intelligence Report
    • You’ve Read The Last Issue of Intelligence Report, Now What?
    • Dick Young’s Research Key: Anecdotal Evidence Gathering
    • Crisis at Vanguard
  • Investment Analysis
    • Bonds
    • Currencies and Gold
    • Dividend Investing
    • ETFs & Funds
    • Investment Strategy
    • Retirement Investing
    • Stocks
    • The Efficient Frontier
  • Investment Counsel
  • Retirement Compounders®
  • Free Email Signup

TIPS Yield: What You Should Know Today

March 16, 2011 By Jeremy Jones, CFA

With commodities prices surging and inflation pressures heating up in certain sectors of the economy, the financial press is loaded with articles offering advice on how to protect your portfolio from inflation. One of the more common recommendations is to buy Treasury inflation-protected securities (TIPS). This is a strategy we advise against. 

It isn’t that we are averse to TIPS. But the problem with buying TIPS today is that yields are far too low and durations on many TIPS and TIPS funds are too long. By example, the yield on the Vanguard Inflation-Protected Securities fund is only 0.36%, and the fund has a duration of 7.6. It is important to recognize that the yield and duration on VIPSX isn’t comparable to the yield and duration on nominal bond funds. The 0.36% yield on VIPSX is the real yield or the yield an investor will earn in addition to inflation. So everything else equal, an inflation rate of 2% over the next year would translate into a 2.36% return on VIPSX. 

Unlike the duration on a basic Treasury bond fund, the duration on VIPSX is the approximate percent change in price for a 1% change in real yields. So if the 0.36% yield (a real yield) on VIPSX rose to 1.36%, the price of the fund would fall about 7.6%.

That’s instructive, but why should investors care about the real yield? Isn’t the financial press advising TIPS as an inflation hedge? Indeed they are, but an adverse move in real yields, could cause TIPS prices to plunge. Take a look at our real 10-year Treasury yield chart. Here I am simply taking the historical nominal treasury rate and subtracting the average inflation rate over the previous 10 years. Over the last five decades, the real 10-year Treasury yield has averaged 2.71%. Today, real yields are 0.99% as measured by 10-year TIPS. By historical standards, real yields are low. What would happen to TIPS prices if real yields rise to their historical average? A 1.70% rise in 10-year TIPS yields would translate into an unpleasant 14% drop in TIPS prices. That’s not the inflation protection many investors think they are buying.

Of course, we are assuming an instantaneous rise in interest rates to come up with our 14% projected loss on TIPS. What if it took a few years for rates to rise and during that time inflation accelerated? What kind of a return would 10-year TIPS earn then? It still wouldn’t be pretty. If you assume a three-year holding period, a 1.7% rise in real yields, and inflation of 4% annually, 10-year TIPS would return 1.15% annually over the next three years. That’s far below the assumed inflation rate of 4%.

Share this:

  • Email
  • Twitter
  • Facebook

You Might Also Like:

  • Junk Bonds go Bonkers
  • Junk Bonds Get Trashed
  • Investors Flee High-Yield Debt
  • Author
  • Recent Posts
Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. CNBC has ranked Richard C. Young & Co., Ltd. as one of the Top 100 Financial Advisors in the nation (2019-2022) Disclosure. Jeremy is also a contributing editor of youngresearch.com.
Latest posts by Jeremy Jones, CFA (see all)
  • The Cloud Slowdown Is Hurting Amazon the Most - February 8, 2023
  • Real Estate “Power Buyers” Suffering Glut of Inventory - February 7, 2023
  • AI SEARCH WAR BEGINS: Google and Microsoft Join AI Battle - February 6, 2023

Search Young Research

Most Popular

  • You Aren't Getting These Yields from Your Bank Account
  • Tom Brady Retires, Again. Should You?
  • What Your Survival Guy Invested in Today
  • Suddenly, Holding Cash Looks Good Again to Many
  • Do You Trust This Rally?
  • Vanguard Wellesley (VWINX) vs. Wellington (VWELX): Which Fund is Best?
  • The Power of a Compound Interest Table
  • What Happens if the "Fed Put" Is Over for Good?
  • Early Advice from Her Dad on Tipping at Charlie Trotter’s
  • Warren Miller: If You Don’t Do It This Year, You’ll Be…

Don’t Miss

Default Risk Among the Many Concerns with Annuities

Risk and Reward: An Efficient Frontier

How to be a Billionaire: Proven Strategies from the Titans of Wealth

Could this Be the Vanguard GNMA Winning Edge?

Cryptocosm and Life After Google

Warning: Avoid Mutual Fund Year End Distributions

Is Gold a Good Long-term Investment?

How to Invest in Gold

Vanguard Wellington (VWELX): The Original Balanced Fund

What is the Best Gold ETF for Investing and Trading?

Procter & Gamble (PG) Stock: The Only True Dividend King

The Dividend King of the North

You’ll Love This if You’re Dreaming of an Active Retirement Life

RSS The Latest at Richardcyoung.com

  • Big Hearted, Idealistic, Daring…
  • Yes, Your Children Are Listening to You
  • BEN CARSON: How Is Biden’s Speech Creating Unity?
  • Biden’s State of the Union Address Receives Rough Reception
  • Can a Capital Injection Save Bed Bath & Beyond?
  • You Aren’t Getting These Yields from Your Bank Account
  • Democrats’ Widening Schism
  • Jimmy Buffett Playing Key West
  • Whatever You Knew, Dave Hammer Knew More
  • Dragon Tours Open for Business

RSS The Latest at Yoursurvivalguy.com

  • Yes, Your Children Are Listening to You
  • You Aren’t Getting These Yields from Your Bank Account
  • Bidenflation Has Eaten Up Americans’ Pandemic Savings
  • Dragon Tours Open for Business
  • What Your Survival Guy Invested in Today
  • You Invest, They Win: FTX Edition
  • Your Retirement Life: Adventure Awaits
  • Zumwalt-Class Guided Missile Destroyers to Get Hypersonic Weapons
  • Early Advice from Her Dad on Tipping at Charlie Trotter’s
  • Treasury Bonds Ready to Rock and Roll

About Us

  • About Young Research
  • Archives
  • Contributors

Our Partners

  • Richard C. Young & Co.
  • Richardcyoung.com

Copyright © 2023 | Terms & Conditions

 

Loading Comments...
 

    loading Cancel
    Post was not sent - check your email addresses!
    Email check failed, please try again
    Sorry, your blog cannot share posts by email.