Treasury inflation-protected securities (TIPS) are government-issued bonds that are indexed to inflation. Thus, when 澳洲幸运5官方开奖结果体彩网:inflation rises, TIPS can generate greater returns compared to bonds that are not 澳洲幸运5官方开奖结果体彩网:inflation-linked. As inflation rises, TIPS adjust in price to maintain their 澳洲幸运5官方开奖结果体彩网:real value. This makes them popular with investors, particularly when 🔴the economy isn't performing well or when the specter of inflation rears its head. For many investors, TIPS seem like an obvious choice when there is a🦹bove-average uncertainty about inflation and market returns.

Unfortunately, TIPS do not always live up to their billing, primarily because most people don't understand this investment as well as they should.

1.𒊎 TIPS Often Under🏅perform Traditional Treasuries

In many ways, TIPS are similar to other government securities sold by the U.S. Treasury. As with 澳洲幸运5官方开奖结果体彩网:Treasury bonds, they are backed by the 澳洲幸运5官方开奖结果体彩网:full faith and credit of the United States government and pay semi-annual interest. The crucial difference is the face value of a TIPS bond is adjusted according to the official 澳洲幸运5官方开奖结果体彩网:consumer price index (CPI). The higher the CPI, the higher the face value for the TIPS.

On the surface, this seems like a great deal. After all, inflation eats away at nominal interest payments. With TIPS, an upward adjustment of face value also means that interest payments go up with inflation. TIPS are, therefore, perceived as safer, which lowers their expected returns because of the 澳洲幸运5官方开奖结果体彩网:risk-return tradeoff. However, TIPS aren't the only securities that price in inflation. Standard Treasury bonds also have an im🎃plicit inflation adjustment.

TIPS Performance

If the markets anticipate inflation to be 3% over time, then that expectation is priced into the bond market. Investors make decisions based in part 🏅on whether they think inflation will be higher or lower than what the price of a security reflects. That impacts the va🍌lue of TIPS and standard Treasury bonds, but TIPS are less likely to win this exchange.

Given this scenario, TIPS will only perform better than Treasury bonds if the stated CPI is higher than what the market anticipates. Several prominent economic theories, including 澳洲幸运5官方开奖结果体彩网:rational expectations and 澳洲幸运5官方开奖结果体彩网:efficient markets, suggest that is unlikely.

On the other hand, TIPS have very real issues during periods of financial stress when traditional Treasury bonds shine. The problem is due to the way the government designed the 澳洲幸运5官方开奖结果体彩网:deflation floor for TIPS. The Treasury guarantees that the 澳洲幸运5官方开奖结果体彩网:principal for TIPS will not fall below ✤the original value.

However, later upward adjustments for inflation can be taken back if deflation occurs. Therefore, newly issued TIPS offer much better protection from deflation than older TIPS with the same time to maturity. When deflation becomes an issue, as it did in 2008 and again in March 2020, TIPS ETFs, such as the iShares TIPS Bond ETF (TIP), declined significantly.

2. The CPI May Not R༒eflect Your True I🐼nflation Rate

There are reasons to believe inflation might be higher than official statistics suggest for older and even middle-aged Americans. These are also the groups more likely to buy TIPS. The CPI originally measured a fixed basket of goods. However, consumers often switch to cheaper new goods, making inflation numbers based on a fixed basket of goods too high. The Bureau of Labor Statistics (BLS) revised the CPI to 澳洲幸运5官方开奖结果体彩网:include these substitutions.

Many people tend to become more set in their ways as they grow old൩er, which means they are less likely to switch to new goods. Some of this reluctance is simply logical, as they have less time to recoup investments in learning new ways to do things.𓃲 It is precisely the retirees seeking to preserve income with TIPS who are least likely to make substitutions, so they end up with higher inflation.

Substitution seems like a subtle effect, but consider how profound it can be. Some retirees looking to TIPS for protection still use landline phones instead of VoIP or smartphones and cable TV rather than streaming video. These costs can add up. Most critically, retirees m♏ay continue to live in location♐s that have become less affordable.

3. TIPS Prices Are Volatile

Some have called TIPS the only risk-free investment because of their principal safety and inflation protection features. However, one of the major indicators of risk is price 澳洲幸运5官方开奖结果体彩网:volatility, and TIPS often come up ওཧlacking in this department.

TIPS are less liquid than traditional treasury securities. This lack of liquidi♊ty can lead to large bid-ask spreads and drive down prices if there are not enough buyers in the mark🌳et.

The wild price swings seen in 澳洲幸运5官方开奖结果体彩网:TIPS ETFs during the 2008 and 2020 stock market crashes show they are not nearly as stable as cash in the short run. After all, TIPS prices follow changes in market yields — if yields rise, this puts downward pressure on TIPS prices. What is more, TIPS with substantial accumulated inflation factored into their prices could lose a significant amount if a deflationary 澳洲幸运5官方开奖结果体彩网:depression occurred.

The Bottom Line

That is not to say that you should never invest in TIPS. Just be aware of their potential shortcomings. 澳洲幸运5官方开奖结果体彩网:Understanding how TIPS work is the key to using them e💮ffectiv﷽ely in your portfolio.