“First, despite a recent rise in bank lending, most of the extra stimulus money created by the Federal Reserve is still sitting on bank balance sheets,” Koesterich wrote at the iShares blog. “Also, as this money starts hitting the supply, there will likely be a lag before inflation hits. Historically, it has taken about two to three years before growth in the money supply has translated into a meaningful acceleration in inflation.”
Morningstar stresses some caveats that investors should keep in mind with TIPS.
“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,” the investment researcher said. “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.”
PIMCO Total Return ETF (NYSEArca: BOND) manager Bill Gross has been warning investors about the risks of owning nominal Treasuries. He recently said if investors want to own long Treasuries, buy them in TIPS form. [PIMCO’s Gross Favors Shorter Duration, Inflation-Protected Bonds]
Finally, it should be noted that some investors think the way the government weights the components of the the CPI results in the benchmark underestimating the inflation rate that consumers are actually experiencing.
iShares Barclays TIPS Bond Fund
