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.
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The breakeven inflation indicator is used to quantify inflation expectations. Specifically, it is the spread difference in yields between normal Treasuries and Treasury Inflation-Protected Securities, or TIPs, of similar duration. By taking the spread differential, investors may determine how much influence inflation has on Treasury yields.
“RINF gives buyers a way to profit from increases in the market’s expectation of inflation. To do so, the fund buys 30-year TIPS and sells a similar amount of duration-adjusted U.S. Treasury bond positions (mostly futures and swaps), attempting to achieve an overall effective duration of zero. The fund is rebalanced monthly,” according to Financial Advisor.
For more information on the fixed-income market, visit our bond ETFs category.