The long and short of TIPS

October 11, 2012


Since the introduction of the U.S. Treasury Inflation Protected Securities (TIPS) market in 1997, an investment in broad-market TIPS has generally acted as an "inflation hedge."  Still, with a duration that is longer than the nominal U.S. Treasury market, the aggregate U.S. TIPS market carries considerable interest rate risk.  A new Vanguard research paper compares the correlation of U.S. inflation with TIPS benchmarks of three distinct maturity buckets. Their analysis reveals that, while short-term TIPS may display higher correlation with inflation, the risk-return trade-offs in allocating between a short- and longer-maturity TIPS portfolio parallel those involved when selecting the interest rate exposure of a portfolio of U.S. Treasuries, corporate bonds, or municipal bonds.

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