This Type of Investment Is Primed to Do Better

Near the beginning of October, I discussed how Treasury Inflation-Protected Securities (TIPS) are very attractive. I shared that my IRAs were 6..6% invested in them and explained why. Well, now I am 21% invested in them. In this follow-up, I explain why I continue to feel so strongly that TIPS make sense right now.

How TIPS Have Been Performing

Since my piece almost six weeks ago, Treasury yields have soared. This is kind of odd, as the Federal Reserve cut the Fed Funds target again last week after the larger cut in September. It has now reduced the target to 4.50-4.75% from 5.25-5.50%, a reduction of 75 basis points. Both cuts were in line with what had been expected. Here is how the yield-curve for U.S. Treasury securities has changed since the day before my article:

I don't track TIPS rates as closely as I do regular Treasury rates, but they are somewhat higher since 10/1. The rise in their yields has been a lot less than the rise in interest rates of Treasury securities.

In my write-up, I shared that I had invested in the iShares TIPS Bond ETF (TIP) in my IRA and the Vanguard Short-Term Inflation-Protected Securities Index Fund (VTSPX) in my philanthropic fund. Both have declined since then, with TIP down 1.9% and VTSPX dropping 0.4%. I recently discovered another ETF that is not as big as the funds I have selected but focused on just the longest-dated TIPS, the PIMCO 15+ Year US TIPS ETF (LTPZ), which has dropped 4.7% since 10/1. The 30-Year U.S.

Bond Futures (December expiration) has declined by 5.7% since 10/1.

So, bond prices are lower, and TIPS are lower but by less of a price change. In the initial look, I discussed how gold, which is a more traditional hedge against higher inflation, had rallied so much. SPDR Gold Shares (GLD) have gained 1.0% since then, performing slightly better than TIP. Stocks, though have gained a lot since then, with SPDR S*P 500 ETF (SPY) rallying 5.2%. Small-caps have soared since then, with iShares Russell 2000 ETF (IWM) up 9.3%.

Why TIPS Should Do Better

It is quite interesting to see Treasury securities getting pounded lower after the Federal Reserve has slashed Fed Funds and to see gold stalling in its advance. Over the past year, GLD has soared 38.1%, and Treasury rates are a bit lower still. On September 19th, I published a piece suggesting that investors consider fighting the Fed and am not surprised by the higher rates.

Of course, there is a lot more going on now than just the Federal Reserve lowering short-term rates. We just had a Presidential election. I don't believe that either candidate could have overcome easily the big challenges that we face as a country with respect to the large federal deficits, but I guess that some are concerned about the potential tariffs ahead causing inflation. Still, gold is not soaring as bonds sell off.

Looking over the past 5 years, GLD has offered investors a total return of 80.5%, while the total return of TIP has been 11.3%. Both of these are lower returns than for SPY:

The returns from the election date in 2016 when Trump was elected to the election date in 2020 when he lost have been similar, though a bit tighter:

As I explained in the last piece, TIPS pay a rate of interest that is lower than what a regular Treasury security yields, but their principal amount adjusts for inflation (or deflation!). The big rise in yields suggests that inflation may be sticking around, and this will boost the total return of TIPS. The yields on the TIPS are currently 2.43% lower for the 5-Year, 2.36% lower for the 10-year and 2.31% lower for the 30-year. This level is less than the current rate of inflation.

While I don't count on the Wall Street Journal to always get things right, I was very pleasantly surprised to see Jason Zweig's The Intelligent Investor piece on November 8th suggesting that TIPS a great again.

The piece wasn't a call to buy a fund or an ETF, but he wrote a broader piece about how to protect against inflation. He cited the real yield of 2%+ being the highest level in 15 years. These real yields were negative in 2020 and 2021 after the pandemic hit. He included some charts from Morningstar that showed how money flowed into TIPS funds after the pandemic and then pulled out near the end of 2022. Sorry for those who didn't understand that people tend to buy high and sell low! They are rising now. I agreed with his conclusion: "I’m buying TIPS. You should, too."

Conclusion

Prices are not substantially different from when I first bought TIP and VTSPX, but stocks are higher and bond prices are lower. I am not trying to make a big inflation bet, but I don't like stocks or bonds and think that the TIPS could see demand like gold has seen. The ETFs and funds are quite large in size, and the liquidity is excellent for the ETFs. If inflation falls, it won't be good for an investment in TIPS, but it will likely be a lot worse for gold.