Inflation Protection: TIPS ETFs are New Safe Haven

June 12th at 1:20pm by Tom Lydon

Bond investors have become comfortable with risking a lower payback than what they have invested for the benefit and security of inflation protection. Some U.S. bond exchange traded funds have become the latest hideout for inflation protection.

“Treasury Inflation Protected Securities, or TIPS, have been a popular investment lately, even as upward pressure on consumer prices has moderated. Some fear the Federal Reserve won’t be able to contain inflation over the long run after its unprecedented bond-buying programs have flooded the economy with cheap money,” Cynthia Lin wrote on The WSJ. [Investors Buying TIPS for Inflation Protection]

The yield on a 10-year Treasury note is hovering around 1.8%, with the yield on a 10-year TIPS (Treasury Inflation Protection Securities) yielding about -0.33%.

TIPS are available on a “secondary” market through mutual funds or ETFs, such as the iShares Barclays TIPS Bond Fund ETF (NYSEArca: TIP). They pay semi-annual interest to the holder, so are sometimes seen as a safe way to provide retirement income. More people are looking at them as a potential way to preserve their savings in an inflationary environment, according to a report on Seeking Alpha. [TIPS ETFs as an Inflation Hedge]

“Cash still needs to be put to work, and investors are looking for any sort of value. TIPS offer that given the strong U.S. fundamentals relative to what else is out there, and all the richness in other safe assets,” Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York said.

So far this year, U.S. inflation linked debt maturing in 10 years or less has returned 5.1%, compared to 1.1% for the broad Treasury market, according to Bank of America Merrill Lynch data.

The ongoing uncertainty of Greece exiting the Eurozone, and the slower than usual economic growth has investors seeking safe havens. The TIPS ETFs have allowed investors to park capital into a haven other than the usual commodities such as gold.

The greatest risk to TIPS is that they increase their yield to match inflation, which is tied to the CPI (Consumer Price Index). The risk is posed if the CPI is not an accurate tracking of inflation. [TIPs ETFs and Negative Yields]

Other TIPS ETFs:

  • PIMCO 1-5 Year TIPS (NYSEArca: STPZ)
  • SPDR Barclays Capital TIPS (NYSEArca: IPE)
  • Schwab U.S. TIPS (NYSEArca: SCHP)

iShares Barclays TIPS Bond Fund ETF

Tisha Guerrero contributed to this article.

Full disclosure: Tom Lydon’s clients own TIP.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.