While some corners of the fixed income market have languished in the wake of last week’s stunning presidential election results, one area is standing out: Treasury inflation protected securities (TIPS).
This year, investors have been pouring into ETFs such as the iShares TIPS Bond ETF (NYSEArca: TIP) and the Schwab U.S. TIPS (NYSEArca: SCHP). That trend looks poised to continue as TIPS have been favored destination after Donald Trump’s upset victory in last week’s election. Additionally, data confirm U.S. inflation is creeping higher.
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 yield on the 10-year Treasury note has moved from 1.86% as of Tuesday’s close to 2.08%. That’s a 22 basis point move. If look you look at the 10-year inflation- linked security, over same period the yield has gone up about 5 basis points. You have a slight negative return, but much less than Treasuries,” according to a Standish Mellon note posted by Amey Stone of Barron’s.
TIPS ETFs are indexed to inflation as a way to shield investors from the negative effects of inflation. The securities’ par value rises with inflation as measured by the Consumer Price Index while interest rate remains fixed.