Investors have been buying TIPS even though the bonds have seen yields more into negative territory, which highlights the demand. [TIPS ETFs and Negative Yields]
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.”
TIP, the iShares TIPS fund, is trading near an all-time high although the ETF has pulled back somewhat in June as Treasury yields have bounced a little.
The inflation “break-even rate” is important to watch. It is determined by comparing the yields of regulator government bonds against inflation-protected securities of the same duration, usually 10 years. If inflation averages more than the breakeven rate over the next decade, then investors would be better off owning TIPS than normal Treasury bonds.
iShares Barclays TIPS Bond Fund
