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“That’s not because they’re broken it’s simply that movements in the bond market have historically dwarfed movements in CPI.” 2. “The moves in TIPS have little to do with the actual fluctuations in the CPI,” wrote Dave Nadig recently.

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This doesn’t mean that inflation isn’t a driver of TIPS performance, but rather that these securities are impacted more significantly by other factors, including changes in interest rates. Source: IndexUniverse, citing Research Affiliates, based on data from Morningstar Encorr. inflation between January 2002 and March 2009: Asset Class The following table displays the quarterly correlation of various asset class returns to U.S. Perhaps greater cause for concern is the correlation of TIPS to inflation in recent years. The fact that TIPS have a relatively short history obviously isn’t sufficient reason to steer clear. TIPS were first introduced in 1997, meaning that they have endured a relatively stable CPI trajectory since their inception and have never been tested in a high in a true high-inflation environment. While it’s obviously impossible to extract individual investor motives with any precision, it seems likely that a fair number of investors in TIP aren’t worried about inflation that tests the high end of the Fed’s “comfort zone,” but rather about hyperinflation reminiscent of 1973 or 1981 that breaks into double digits. TIP is a good start for investors anxious over the prospect of runaway inflation, but for several reasons it might not be the silver bullet some investors think it is: 3. So conceptually, the appeal of holding these bonds in an inflationary (or hyperinflationary) environment is easy to grasp. Because the interest rate is applied to an adjusted principal amount, the interest payments made will rise and fall with inflation. TIPS make interest payments twice per year.

When a TIPS matures, the noteholder is paid the adjusted principal or the original principal, whichever is greater. Unlike most Treasuries, the principal of TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Treasury Inflation-Protected Securities (TIPS) are debt issued by the U.S. Wary of the ramifications for traditional stock and bond portfolios when the bill for the recent stimulus plans comes due, investors have begun seeking out protection. and around the world, many investors believe that higher inflation is inevitable and that hyperinflation is entirely possible.

In the wake of massive injections of liquidity to the financial systems in the U.S. While economists are divided over exactly what causes inflation and hyperinflation, many academic studies have uncovered a strong link between CPI and money supply. has experienced surges in inflation before, most recently during the late 1970s and early 1980s when CPI peaked above 15%. The Case For Inflation Protectionįor the last 25 years, inflation has been moderate, generally hovering between 1% and 4%. TIPS are a good place to start, but they have some inherent limitations–particularly within the exchange-traded structure–that may diminish their ability to protect against inflation. But investors terrified over the prospect of a spike in inflation who think they’ve found a Holy Grail might have a false sense of security. The expense ratio of 20 basis points is one of the lowest for any fixed income ETF. Treasury Inflation Protected Securities Index–with impressive efficiency. It accomplishes its stated objective–tracking the performance of the Barclays Capital U.S. But those investors who are counting on TIP to protect their portfolio may be set up for a colossal disappointment. And clearly, many think they’ve found the solution in the form of inflation-protected bonds. Clearly, investors are concerned about inflation. This trend has continued in 2010 fund has already seen inflows of more than $1.5 billion through the first two months of the year. TIP has seen its popularity surge over the last year, taking in nearly $9 billion in cash in 2009. And in the top spot was the Barclays TIPS Bond Fund ( TIP), which invests in inflation-protected securities issued by the U.S. The list, which was based on information provided by Morningstar, included several traditional inflation hedges, such as the SPDR Gold Trust ( GLD) and iShares COMEX Gold Trust ( IAU), as well as the broad-based PowerShares DB Commodity Fund ( DBC). Earlier this month, InvestmentNews released a list of the ten ETFs financial advisors researched the most in 2009.