Now, is it going to be deflation or inflation? That’s the million-dollar question. We have been hearing about the ongoing debate and we should have a exchange traded fund (ETF) or other investment strategy in place.
In the Treasury bond market, yields edged up again on Tuesday to reach a new six-month high, reports Tom Petruno for The Los Angeles Times.
The United States’ $26 billion auction of seven-year Treasury notes, however, went better than feared. Interest from indirect bidders, domestic and foreign institutions was around 33%, in line with the last seven-year sale, said Geoffrey Rogow and Peter A. McKay for The Wall Street Journal.
This has somewhat abated fears that investors were abandoning Treasuries because they’re feeling better about the economy and buying high-risk assets such as junk bonds, commodities and foreign currencies.
But as inflation fears continue to mount, there are two ways of dealing with our current dilemma: The Fed could start reducing the money supply to increase interest rates, but this is rather unlikely since Federal Reserve Chairman Ben Bernanke has insisted on a need to keep short-term interest rates low.
Or the Fed could consider increasing the annual inflation to a 6% level for a few years so as to end deflation worries and ease our economy’s debt burden.
If you’re looking for tips on how to invest in any of these scenarios, here are some.
TIPS (Treasury Inflation-Protected Securities) can help hedge against inflation in three ways:
- TIPs 101. Treasury Inflation-Protected Securities help you maintain the purchasing power of your dollar even as inflation takes it away. TIPS offer a fixed yield plus the inflation rate to keep pace with changes in the consumer price index
- Why now? The inflation insurance that TIPS provide is cheap, but is gradually getting less so. Smart shoppers know the best time to buy insurance is when you don’t absolutely need it.
- Using ETFs. TIPS may be attractive, and many financial advisers recommend a permanent 15% portfolio allocation to the class, but buying these bonds at periodic Treasury auctions or in the secondary market can be a pain. An ETF made up of TIPS is easier and more cost efficient.
For a TIPS-focused ETF, have a look at:
- iShares Barclays TIPS Bond (TIP): up 2.3% year-to-date
- iShares Lehman 3-7 Year Treasury Bond (IEI): down 3.1% year-to-date; yields 2.8%
Max Chen contributed to this article.