In an attempt to fight off deflationary pressures, the Federal Reserve will likely start throwing more money out into the economy by next week. Consequently, yields on Treasury inflation-protected securities (TIPS) and exchange traded funds (ETFs) dipped to new lows as traders sought refuge from potential inflationary spikes.
Yields on TIPs were recently auctioned at negative yields, which means that inflation has to increase for this investment to be profitable, writes Ben Levisohn for Yahoo! Finance. In the past, TIPS have had a low correlation to the consumer-price index, so it is not guaranteed that they will perform extremely well if inflation increases. If inflation rises too quickly, the Fed may have to increase rates, which would also hurt bonds since bond prices decrease as interest rates rise. [TIPS ETFs: A Surge in the Making?]
Investment strategists suggest playing commodities as a hedge against rising inflation – commodities have a higher correlation to the consumer-price index as compared to TIPS. However, some strategists warn about the high valuations in some precious metals and urge investors to consider commodities that have done equally well in inflationary periods, such as oil or base metals. [Commodity ETFs and the Changing World.]
Additionally, foreign currencies may also be a good play since inflation would devalue the U.S. dollar, which would prompt currency traders to favor currencies in countries that have more stringent inflation controls. Australia, South Korea, Singapore and Sweden have all raised interest rates to keep inflation dampened. [The Rush to Foreign Currency ETFs.]
Dividend-paying stocks have also historically done quite well during times of inflation. Companies would pass inflation onto consumers and their foreign operations would benefit from a weaker dollar. [The Dividend ETF Comeback.]
For more information on inflation, visit our inflation category.
Max Chen contributed to this article.
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.