- Treasury inflation protection securities (TIPS) and the corresponding ETFs have not garnered as much attention
- That could change as now could be the ideal time for advisors and investors to consider adding inflation hedges to their portfolios
- If the Fed raises rates too quickly, it could raise deflationary pressures, which could send the economy into a spiraling decline as cash becomes more valuable
Without much inflation in recent years, Treasury inflation protection securities (TIPS) and the corresponding exchange traded funds have not garnered as much attention as other corners of the fixed income universe.
That could be starting to change as now could be the ideal time for advisors and investors to consider adding inflation hedges to their portfolios.
If the yield curve steepens, every fixed-income asset will see higher rates but longer dated bonds will see yields rise the most, suggesting that the economy is quickly heating up. That would make ETFs like TIP more attractive to fixed income investors.
Last year’s sudden plunge in oil prices has helped keep prices low, but the Fed believes the drop in oil prices will only be short-term. However, the stronger dollar is a dominant factor in keeping commodity prices depressed. The iShares TIPS Bond ETF (NYSEArca: TIP) is a popular avenue for investors looking for TIPS exposure.
“It might seem strange to worry about inflation with oil prices plummeting. But it’s precisely when no one cares about a risk that it becomes cheapest to hedge. Typically, TIPS are compared with traditional Treasury bonds. The narrower the yield spread between the two, the cheaper TIPS are on a relative basis. Currently, the spread is 1.51 percentage points for 10-year TIPS versus 10-year Treasuries,” reports Lewis Braham for Barron’s.
If the Fed raises rates too quickly, it could raise deflationary pressures, which could send the economy into a spiraling decline as cash becomes more valuable, prices continue to fall and Americans withhold spending to buy something cheaper tomorrow. [ETFs for a Deflationary Period]