While Treasury inflation-protected securities (TIPS) may seem complex and daunting, it’s important to dive into their intricacies. After all, their current yields present an enticing opportunity and a compelling alternative to conventional Treasury bonds.
Treasury inflation-protected securities yields consist of two key elements: an inflation adjustment linked to the consumer price index and a real yield, providing an additional bonus beyond the inflation rate. The real yield has surged to almost 2.5%, its highest point in 15 years.
Amid inflation surpassing 3%, certain TIPS now boast yields of around 6%. The ultimate gains for TIPS investors, spanning maturities of up to 30 years, hinge on the trajectory of future inflation rates.
“The real yield is getting back to abnormally high levels,” Research Associates Founder Rob Arnott told Barron’s. “Looking at 10- and 30-year TIPS and 10- and 30-year Treasuries, the easy choice is to own TIPS. Inflation is more of a risk than the markets give it credit for.”
Seek Protection From Inflationary Surprises With TIPS ETF VTIP
The Vanguard Short-Term Inflation-Protected Securities ETF (VTIP ) can provide protection from inflationary surprises or unexpected inflation. It tracks an index of inflation-protected public obligations of the U.S. Treasury with a remaining maturity of less than five years.
The fund is designed to generate returns more closely correlated with realized inflation over the near term, and to offer investors the potential for less volatility of returns relative to a longer-duration TIPS fund.
Given its shorter duration, VTIP is expected to have less real interest rate risk, but also lower total returns relative to a longer-duration Treasury inflation-protected securities fund.
For more news, information, and analysis, visit the Fixed Income Channel.