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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Notes:

All investments are subject to risk, including possible loss of principal.
Bond funds are subject to the risk an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
U.S. government backing of Treasury or agency securities applies only to the underlying securities and does not prevent share-price fluctuations. Unlike stocks and bonds, U.S. Treasury bills are guaranteed as to the timely payment of principal and interest.
 

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