Friday, January 18, 2008

The Charms of TIPS

"Unlce Sam's inflation-linked bonds, known as Treasury inflation-protected securities or TIPS, are extremely safe, low-yielding investments, which shield holders from the eroding effects of inflation, and are much favored by long-term investors, such as pension funds. ... On Friday, the yield on the 10-year TIPS note stood at 1.56%, while the 10-year fixed-rate, or nominal, Treasury bond was 3.82%. The difference between the two, 2.26 percentage points, equates roughly to the market's expectation for the average annual rise in inflation over the next 10 years", Matthew Cowley (MC) at Barron's, 14 January 2008.

"When they fear inflation, bond buyers typically seek higher yields to protect the value of their investment. ... But sharply lower yields [since 10 January] overall are hardly a symptom of rampant inflation anxiety", Mark Gonloff at the WSJ, 16 January 2008.

MC and I live in alternative worlds. "TIPS ... shield holders from the eroding effects of inflation" he claims. What? Holding TIPS guarantees you will lose to inflation! I used MC's title for this post. The only one "charmed" by TIPS, is Uncle Sam, the issuer. See also my 5 October 2007 post.

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