“It is important to note that inflation is just one component of interest rates and that changes in the ‘real rate’ or the risk-free cost of capital will cause the value of TIPS to oscillate up or down just like Treasury bonds,” Morningstar says in an analyst report on iShares Barclays TIPS Bond Fund. “It is also important to note that because of the inflation adjustment on TIPS, the yield you get today is not set in stone, and investors should be prepared for it to move up or down depending on the movements of the CPI.”
The so-called inflation break-even rate is currently around 2.4%. The rate is determined by comparing the 10-year Treasury bond yield with the 10-year TIPS yield.
If inflation averages more than the breakeven rate over the next decade, then investors would be better off owning TIPS than normal Treasury bonds. [ETF Chart of the Day: TIPS]
PIMCO 1-5 Year TIPS
