“Despite its inflation protection, fluctuating interest rates still lead to volatility here,” according to a Morningstar analyst report on TIP. [TIPS ETFs Hurt by Rising Treasury Yields]
“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,” it said. “Because yields are near all-time lows, even if inflation expectations rise, TIPS bonds are still a low-return investment. Finally, if interest rates rise faster than inflation expectations, then TIPS will still lose value.”
“Anyone who believes TIPS are a safe investment is certainly not doing their homework,” said Jason Ware, market strategist and chief analyst for Albion Financial Group, in the Reuters column. “When rates do rise, which eventually they will, there is going to be some pain in TIPS.”
iShares Barclays TIPS Bond Fund
Full disclosure: Tom Lydon’s clients own TIP.