Inflation Protected outperformance in 2009

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Eric White
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Joined: Fri May 18, 2007 10:09 am

Inflation Protected outperformance in 2009

Post by Eric White »

During my annual rebalancing, I noticed significant outperformance of inflation protected relative to short and intermediate term funds within my fixed allocations:

Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX) +10.8%
Short-Term Treasury (VFISX) +1.44%
Intermediate-Term Treasury (VFITX) -1.69%

I would like to understand the root cause of this overperformance and whether VIPSX will be more robust than VFISX & VFITX moving forward. However, I don't want to chase performance and have an unreasonable asset allocation on the fixed side. If it is truly more robust to pricing and duration risk, I'm considering overweighting relative to short & intermediate.

Can other forum members weigh in whether I should overweight inflation protected over short and intermediate?


Eric White
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Post by richard »

Don't overweight due to recent high performance.

Due to economic conditions in late 2008, TIPS became very cheap and nominal treasuries became very expensive. Cheap led to higher returns than expensive as things became a bit more normal.

If you have a reasonable plan, stick to it. If not, create one.
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Post by dbr »

Looking at noise is not a way to determine whether or not one investment vehicle has a higher expected return than another.

My understanding, which someone may want to modify, is that for similar duration and similar default risk and similar tax status, ie treasury bonds which are state tax exempt, TIPS should have a slightly lower expected return because a premium has to be paid to hedge unexpected inflation.

Maybe one of the bond experts could weigh in with a more systematic explanation or correction.
Still Learning
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Post by Still Learning »

In 2008's financial crisis, money flowed into the safest and most liquid investments.

While TIPS are Treasuries and very safe, they are viewed as less liquid then nominal Treasuries. As a result, near the end of 2008TIPS prices were penalized relative to nominals. This has corrected in 2009 so TIPS prices rebounded, and they outperformed nominal Treasuries.

Another factor was deflationary fears in late 2008 that worked against TIPS prices. With massive reflation efforts by the Fed and Treasury in 2009, deflation fears have abated. This helped TIPS relative to nominal Treasuries in 2009.

I have no clue which will do better in the future.

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Post by livesoft »

You should be selling VIPSX in order to rebalance and not buying.

If you look at its past history, it also went up more than 10% in 2007 and also in 2008. But it also corrected in 2007 and 2008. I'm sure it will do the same kind of things in the future. It is actually quite volatile.
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