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Review Of TIPS: Good Investment In Today's Environment?

Friday, March 16, 2012 - 11:25 AM
This Calafia Beach Pundit blog post provides a good summary (with charts) of TIPS and how they compare with Treasuries. The article's conclusion:
To sum up: TIPS are only attractive to an investor who believes 1) that inflation will prove to be higher than expected, and 2) that economic growth will continue to be disappointing.

Ken TuminKen Tumin5,468 posts since
Nov 29, 2009
Rep Points: 125,017
1. Friday, March 16, 2012 - 4:32 PM
I'm not a big fan of TIPS. While I am hardly a conspiracy wingnut, I do have some reservations with respect to the government setting the rate of inflation, which then sets the TIPS yield, which the afore-mentioned government then has to pay out. Argentina being a good example of how inflation-protected securities can be manipulated.

Stated another way, if you want to keep payouts to inflation-protected bondholders low, you "under-report" inflation. This was the subject of an article in The Economist a couple of weeks ago.

Stated even another way, think about a bond tied to corporate profits. Does anyone doubt the numbers would be skewed to reduce profits, and thus reduce coupon payments?

Just my $.02.
BozoBozo137 posts since
Feb 14, 2011
Rep Points: 937
2. Friday, March 16, 2012 - 5:34 PM
Ken, the two conditions you cite from the article seem contradictory. I can understand the first condition, but the second one doesn't make any sense. If economic growth continues to be disappointing, this should be bad for tips, as it would probably mean low interest rates and low inflation.

I agree with Bozo's point.
loulou541 posts since
Aug 3, 2010
Rep Points: 3,388