Investors are maintaining their affinity for Treasury inflation-protected securities, or TIPS, betting that inflation will continue inching 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.
ETF investors can gain exposure to Treasury inflation protected securities through a number of options, including the iShares TIPS Bond ETF (NYSEArca: TIP), Schwab U.S. TIPS (NYSEArca: SCHP) and SPDR Barclays TIPS ETF (NYSEArca: IPE). TIP was one of the top ETFs last year in terms of new assets added.
Investor demand in a TIPS auction held Thursday was robust.
“The level of direct and indirect bidders was literally off the charts as it’s the most since these auctions began in 2003. Dealers were left with just 16% of the auction vs the average last year of 28%. As a result of the big demand, inflation expectations in the 10 yr breakeven is spiking by 6 bps to 2.09%, the highest since September 2014,” said Peter Boockvar of The Lindsey Group in a note posted by Amey Stone of Barron’s.
TIPS are a type of Treasury security that is 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. TIPS also offer investors another layer of diversification as many aggregate bond funds exclude TIPS from their holdings.
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.
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.
Changes in inflation expectations can cause increased trading activity as investors adjust to a new break-even rate – the yield difference between nominal Treasury bonds and TIPS of the same maturity, and cause swings in TIP prices.
For more information on Treasury inflation protected securities, visit our TIPS category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.