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TIPs Question

Posted: Mon Feb 11, 2019 7:56 am
by Prudence
Below is a link to an article by Larry Swedroe in August 2018. At that time, I believe Larry made a case that TIPs bonds or TIPS funds compared favorably to nominal bonds or nominal bond funds, considering interest rates at that time and various other relevant factors. My take on the article is that, at that time, TIPs could provide investors with a return, comparable to nominal bonds, as well as some protection against unexpected inflation. Any comments are welcome.
https://www.etf.com/sections/swedroe-ti ... nopaging=1

Re: TIPs Question

Posted: Mon Feb 11, 2019 8:17 am
by Call_Me_Op
TIPS always provide protection against unexpected inflation - and that is all they do. No need to cite a particular point in time or interest rates as this is the definition of what TIPS do.

Re: TIPs Question

Posted: Mon Feb 11, 2019 8:51 am
by Blueskies123
If you read the article carefully then you understand TIPS still have "real interest rate" risk. There is one issue TIPS have not fully discussed in the article. In a financial crisis TIPS do not increase in value like nominal treasuries, see 2008. So if you want to sell some in a stock market panic to rebalance into stocks there may not be enough TIPS liquidity as compared to nominal Treasuries. For this reason, I only have a portion (but sizable) of my bond allocations in TIPS.

Re: TIPs Question

Posted: Mon Feb 11, 2019 9:53 am
by Prudence
Good point blueskies. I see two ways to mitigate the liquidity issue. One, hold TIPs bonds to maturity. Two, be prepared to wait out the panic and the liquidity crunch before selling.

Re: TIPs Question

Posted: Mon Feb 11, 2019 10:03 am
by dbr
TIPS provide protection against inflation any time and all times. Whether that is different from other bonds does depend on whether or not that inflation was unexpected as expected inflation is also priced into nominal bonds.

In general TIPS are not going to be a "winner" nor are they going to be a "loser" against other bonds. People who have reason to see inflation as a risk of consequence for them should hold TIPS. People who do not see inflation as a risk of great consequence probably have nothing to gain by holding TIPS. It is probably that retired people who cannot continue to earn inflating salaries over a lifetime and especially those with some nominal fixed income might find inflation more threatening than other investors, for example.

TIPS have interest rate risk in proportion to real, not nominal, interest rate volatility. This is probably less volatility for real rates than for nominal rates. Inflation protection without interest rate risk can be had by building up a reserve of I bonds or trying to find an inflation indexed SPIA.