Conversely, Investopedia recommends that TIPS still have appeal for longer-oriented portfolios despite the negative yields, which it says is a little misleading.
“These bonds are designed to provide a fixed coupon plus a rate that is adjusted based on changes in the CPI. This prevents erosion of purchasing power. So as inflation increases, investors gain that, plus the bonds coupon rate. While as total return component TIPS, probably don’t make much sense, but as an inflation hedge they still remain top notch. Inflation isn’t a guarantee. However, the possibility is gaining momentum,” Investopedia points out.
It should be noted the government-reported CPI has faced criticism that it underestimates inflation.
The so-called inflation break-even rate is hovering around 2%. The rate is determined by comparing the 10-year Treasury bond yield with the 10-year TIPS yield.
“The difference is the rate at which inflation would have to be above over the next 10 years in order for an investor to be better off owning the TIPS than the Treasury bond. The inflation adjustment does swing both ways, though, so any decrease in the CPI will result in a decrease of TIPS principal,” says Morningstar analyst Timothy Strauts.
iShares Barclays TIPS Bond Fund
Full disclosure: Tom Lydon’s clients own TIP.