Although inflation has slowed from its peak, investors and policymakers are still concerned.
The consumer price index has fallen from 9.1% in June 2022, to 3% in January. However, it is still above the Federal Reserve target of 2%.
Greg McBride is the chief financial analyst for Bankrate.com. He said that “the progress towards 2% inflation has stagnated, and the Fed know it.”
Some Fed officials are also concerned about the impact tariffs may have on inflation in months to come.
CNBC reported that investors who want to protect their purchasing power from inflation are turning to Treasury Inflation Protected Securities (TIPS).
What is TIPS? How do they work and what are the benefits?
TIPS are issued and managed by the US Treasury. They function like standard Treasury bonds, but with one key difference: they adjust their principal value with inflation.
When inflation increases, the principal of the bond also rises. This ensures that investors maintain their purchasing power.
In contrast, Treasury bonds and CDs may lose real value if their yields do not keep pace with inflation.
The benchmark 10-year Treasury Bond is currently yielding a little under 4.5%. This rate could struggle to keep up with inflation over the long term.
TIPS are available with maturities of 5, 10, and 30 years.
Investors receive the adjusted principal at maturity or the original principal if it is higher.
Interest payments are calculated on the adjusted principal and increase with inflation.
Growing interest in TIPS among investors
According to a report from Wells Fargo Investment Institute, recent concerns about tariffs and inflationary pressures has led to a renewed interest in TIPS.
“TIPS continues to be a valuable instrument for protecting purchasing power in a inflationary environment,” Douglas Boneparth said, president of Bone Fide Wealth.
“Rates are more attractive now than in previous years.”
TIPS is not without risk.
Colin Gerrety is a client advisor with Glassman Wealth Services. He cited 2022 as a prime example of how rising rates can negatively affect TIPS returns.
“Let’s assume inflation spikes at the same time as interest rates increase,” he explained.
“TIPS could actually lose money, if the negative effects of the rate rise exceed the inflation-related adjustments.”
TIPS actually had a negative return of 11.85% in 2022. However, they still outperformed the standard US Treasurys.
How to incorporate TIPS into a larger strategy
Some experts suggest that investors consider a diversified strategy that includes TIPS and other income-generating assets.
Winnie Sun is the managing director of Sun Group Wealth Partners. She recommends a combination of fixed-income TIPS and dividend-paying stock, as well as laddered CDs, to balance risk and reward.
Boneparth said that he usually advises clients to see TIPS as a part of a diversified investment portfolio, rather than a stand-alone solution.
TIPS can protect against inflation, but investors should also consider the tax implications and possible lower returns in the event of a moderated inflation.
TIPS are an important part of an investment portfolio for those who want to protect their assets. The Federal Reserve will continue to monitor inflation trends.
This post Investors Turn to TIPS As Inflation Concerns Persist Despite Lower Prices: Factors to Consider Before Investing may be modified based on new developments.
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