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TIPS ETF Hits All-Time High as Inflation Trumps Treasury Bonds


The largest exchange traded fund tracking TIPS rallied to a fresh record high Thursday with bond investors positioning for inflation as central banks continue monetary easing and stimulus measures.

The iShares Barclays Treasury Inflation Protected Securities Bond Fund (TIP) has posted a total return of 8% this year and holds nearly $23 billion in assets.

TIPS are fixed-income securities with principal tied to changes in the Consumer Price Index. However, it’s important to remember that TIPS can still be hurt by rising yields like regular Treasury bonds. [TIPS ETFs: Inflation Protection Still Has Risks]

PIMCO Total Return ETF (BOND) manager Bill Gross has been favoring inflation-protected bonds over long-dated Treasuries due to reflationary policies by governments and central banks.

Gross has recommended TIPS as yields on five-year U.S. Treasuries lagged the inflation rate by the most in six months, Bloomberg News reports. The PIMCO bond guru said investors should avoid longer-term Treasuries because policies to spur growth will boost costs in the economy.

“In the short term, bonds are a safe haven. In the long term, inflation is an invisible cost that not every investor can tolerate,” said Yoshiyuki Suzuki at Fukoku Mutual Life Insurance in the report.

TIPS have outperformed Treasuries of similar durations in 2012 on inflation expectations. [Gold, TIPS ETFs Reward Big on Inflation Trade]

For TIPS ETF investors, the inflation “breakeven rate” is important to watch. It is determined by comparing the yields of regulator government bonds against inflation-protected securities of the same duration, usually 10 years. If inflation averages more than the breakeven rate over the next decade, then investors would be better off owning TIPS than normal Treasury bonds.

iShares Barclays TIPS

Full disclosure: Tom Lydon’s clients own TIP and BOND.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.