Investors will typically look at TIPS ahead of an inflationary period since buying TIPS after inflation has gone up means that the security has already priced in the inflation and investors would likely be overpaying for the TIPS exposure.
Potential investors should also be aware that TIPS are generally more volatile than traditional nominal Treasuries due to the inflation adjustments to their principal value.
“The market is currently pricing medium-term inflation at around 1.4% to 1.6%. The Fed’s inflation target of 2% is referenced to the personal consumption expenditures (PCE) index, while TIPS are linked to the consumer price index for all urban consumers (CPI-U), which typically runs 0.3 of a percentage point higher. As long as PCE inflation runs above 1.25% or so, TIPS should outperform nominal bonds. Given the steady economic backdrop and the Fed’s attitude, we believe this is likely,” adds UBS in the note posted by Barron’s.
For more information on the fixed-income market, visit our bond ETFs category.
iShares TIPS Bond ETF (NYSEArca: TIP)