Treasury Inflation-Protected Securities and exchange traded funds that invest in them continue to see solid demand despite the fact the bonds are paying negative yields.
“A $15 billion auction of Treasury Inflation-Protected Securities this month drew the strongest demand since March even though yields on the notes average less than zero percent for the first time,” Investment News reports.
There are several ETFs tracking TIPS, but iShares Barclays TIPS Bond Fund (NYSEArca: TIP) is by far the largest with over $23 billion in assets. Other funds in the category include PIMCO 1-5 Year TIPS (NYSEArca: STPZ), SPDR Barclays Capital TIPS (NYSEArca: IPE) and Schwab U.S. TIPS (NYSEArca: SCHP).
The iShares TIPS ETF has a negative 30-Day SEC yield.
“Even with real rates being negative, investors view TIPS as the optimal place to put your money if you do have to buy U.S. bonds because it is still government paper while also protecting you from long-term inflation,” George Goncalves, head of interest-rate strategy at Nomura Holdings, told Investment News.
TIPS have outgained comparable Treasury bonds over the past decade, according to the article. The iShares Barclays TIPS Bond Fund was a solid performer in 2011, rising 16% over the past year.
When individuals invest in TIPS, the bonds’ principal is hitched to changes in the Consumer Price Index.
“There’s nothing that sounds more ludicrous than accepting a negative interest rate on your money. At least in the case of a certain type of Treasury bonds, though, negative rates suggest that investors are willing to pay up for protection against a potentially huge threat looming on the horizon: inflation,” the Motely Fool reports.
“But what’s particularly frustrating for income-seeking investors is that despite TIPS … seeming to be poised for a big ramp-up in consumer prices, those price increases haven’t for the most part shown up yet. The net result may be that although long-term investors have seen some big gains from TIPS they bought years ago, current investors are likely dooming themselves to poor returns going forward,” it predicts, adding that stocks may be a better inflation hedge.