Treasury inflation-protected securities (TIPS) may sound like old news at this point, but there’s still upside opportunity.
A commonly held belief in the investing world is that by the time you’ve bought TIPS, it’s too late. However, investors might be missing out by avoiding TIPS in the current environment.
When asked if it was too late to buy TIPS, Jason Bloom, Invesco’s head of fixed income and alternatives, ETF product strategy, told VettaFi that this is “absolutely dead wrong.”
“Say you’re looking at two-year TIPS. As long as CPI averages above the TIPS breakeven for the next two years, you will have done better buying TIPS than had you bought in a non-nominal two-year Treasury,” Bloom said.
See more: “Which Fixed Income ETFs Stand Out in the Current Environment?”
TIPS have historically been horrible forecasters of inflation in the short term. They don’t get it right over two years, let along five or 10 years, Bloom said. For the last 12 years, TIPS have massively underpriced actual inflation.
“At almost every day in the last 12 years, had you bought two-year TIPS instead of two-year Treasuries, you would have done better buying TIPS because they constantly underprice CPI,” Bloom said.
Bloom likened TIPS to a mood ring. Many investors believe that TIPS breakeven rates minus nominal Treasury yields will tell determine the real yield. However, that’s not necessarily correct.
“There’s nothing real about that formula,” Bloom said. “TIPS breakevens are meaningless when it comes to what is CPI going to be. It’s just the mood ring as to how much demand is there for inflation protection now versus last week.”
With two-year breakeven rates on TIPS around 2.15%, Bloom said there is still opportunity for investors buying TIPS.
“There’s almost no way mathematically that CPI averages to 2.15% over the next two years — unless we get a deep recession,” Bloom said. “2.2% for five-year, 2.26% for 10-year, and meanwhile consumer 10-year expectations in the Michigan survey are almost 3%.”
“I buy TIPS across the curve rather than nominal Treasuries right now,” Bloom added. “I still think consumers will do well.”
Investors can add exposure to shorter-duration TIPS with the Invesco PureBeta 0-5 Yr US TIPS ETF (PBTP).
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