There are better places for investors looking to avoid inflation pressures in their portfolios than TIPS. Alexandra Scaggs reports in Barron’s:
Investors in search of ways to protect their income against inflation may need to look further than they think: The market created for that purpose may not be a great choice, for either income or returns.
Treasury inflation-protected securities, or TIPS, have attracted investor cash this year as investors bet that a mix of economic reopening and U.S. government stimulus will drive prices higher in the U.S. Funds investing in TIPS have seen 25 consecutive weeks of inflows from investors since October of last year, the longest stretch since a 69-week period that ended in early 2010. They have sent nearly $18 billion into the market—or about 16% of the total assets under management of TIPS funds as of April 7, according to Refinitiv Lipper.
The bet might seem sensible, as many on Wall Street expect an increase in inflation this year. But there are a few reasons that investors may not get what they’re looking for from the TIPS trade.
Their current yields should be a reason for caution among income investors in particular. At the moment, all TIPS maturities other than the 30-year offer negative yields. The 10-year TIPS note yields nearly minus 0.8%, the five-year note yields about minus 1.7%, and the two-year note yields minus 2.6%.
In theory, negative yields could translate into returns if inflation climbs persistently in coming years. But the trade isn’t a simple one. For it to pay off, there needs to be more inflation than the levels that are already priced into the market today. “For TIPS to work, I have to be right on inflation. That’s a pretty difficult call,” says Tom Atteberry, co-manager of the FPA New Income fund. “The Federal Reserve has a lot of smart people, and they haven’t been great at predicting inflation, either.”
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