Friday, April 3, 2009

TIPS Rockin'

Vix and More (hat tip Abnormal Returns) details:

One excellent way to protect against inflation is through the use of Treasury Inflation-Protected Securities, more commonly known as TIPS. As I noted last September in Treasury Inflation -Protected Securities and Inflationary Expectations, TIPS utilize the CPI as an inflationary benchmark and TIPS coupon payments and the underlying principal are automatically adjusted to account for inflation.

After underperforming Treasuries in 2008 (the 5 year duration TIPS index underperformed the 5 year duration Treasury index by 15%), TIPS have come out on fire in 2009, especially following the March 18th announcement that TIPS would be part of the Fed's quantitative easing. With performance that strong, expect investors to chase return, while those looking to lock in 1-2% real return annualized over the next 5 years will keep prices steady in the short-run.

Longer run, I'm not a huge fan as the adjustment to principal is based on CPI (i.e. a government figure). Just last year when the price of food and energy was skyrocketing, CPI only rose slightly. Does anyone expect something different next time around?