If you believe inflation is going to be less than 2.2% you might consider the nominal Treasury bond. If you believe inflation is going to be higher than 2.2% you would consider TIPS.
You would argue that the embedded inflation rate is so low that risk/reward analysis makes TIPS the overwhelming choice at this time. Let’s say inflation is only 1.5% (this would be a historically low long term inflation rate) over the next 10 – 30 years. Then theoretically the investor would lose 1% per year that could have been obtained from the nominal bonds. But what if inflation is 5%, 10%, or 13% as it was in the late 1970’s. Your reward for owning the TIPS instead of the nominal Bonds would be enormous.
Friday's data showed the core consumer price index (CPI), a measure of underlying U.S. inflation, rose in January by the most in nearly 4-1/2 years to a 2.2 percent annualized rate. It drew particular attention as the number was above the Fed's 2.0 percent target, though it is not the central bank's benchmark inflation measure.
The uptick in price pressures has already shifted the market's expectations on the Fed's next move.
"The inflation numbers definitely caught the markets off guard," said Joseph Lavorgna, senior economist at Deutsche Bank in New York.
There will be a day when the time is correct. Perhaps as energy, metal, and farm goods prices bump along the bottom for months on end (now?) .......may be the time to move into TIP or VTIP. At worst they might be dead money for awhile. I'll keep watching too.