The difference between 10-year yields on TIPS and conventional U.S. government securities has widened to 2.27 percentage points from as low as 1.98 on July 26, Bloomberg News reported Wednesday.
“The inflation adjustment does swing both ways, though, so any decrease in the CPI will result in a decrease of TIPS principal. In a deflationary environment, this adjustment manifests itself in a suspension of distributions from the fund. So, investors counting on steady distributions for income should be careful using this product because, during periods of CPI deflation, TIPS will suspend distributions,” Strauts wrote in a report on TIP.
“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,” he added.
iShares Barclays TIPS Bond Fund
Full disclosure: Tom Lydon’s clients own TIP.