Look To TIPS As A Fixed Income Alternative To Bonds

Written by Jeffrey Rosenberg

What…[should] investors [be] looking for to diversify their bond portfolio? We believe now may be a good time to consider Treasury Inflation Protected Securities (TIPS). Simply put, these securities offer protection against inflation. They pay interest twice a year, at a fixed rate, and they increase in value when inflation is on the rise, and decrease when inflation retreats.

As the country’s central bank, the Federal Reserve (Fed) is charged with two overriding tasks: maximizing employment and stabilizing prices. By most accounts, the Fed has achieved its mission on the jobs front – but the same cannot be said for inflation, which has been running lighter than the 2% or so rate the Fed would prefer. Upcoming data will take on heightened importance both for the Fed debate over policy, and also for market expectations.

Prospects for rising inflation come on the heels of the easing of downward pressure on goods inflation.

A stable dollar and stable or even rising commodity prices all point to upside potential in inflation figures in the coming months.

the long-awaited signs of wage inflation have shown up, even if wage gains still pale in comparison to prior recoveries.

Average hourly earnings in September grew slightly below expectations, but the year-over year figure, at 2.6%, continues to highlight the recovery in wages…
Alternative measures that hold the mix of job holders constant (the Atlanta Fed Wage Tracker) show wages growing above 3%.
Add to that survey data from small businesses, which continue to highlight the lack of qualified applicants and a rising share of firms raising compensation.

What does this all mean for investors looking for diversification within their bond portfolio? We believe now may be a good time to consider Treasury Inflation Protected Securities (TIPS). Simply put, these securities offer protection against inflation. They pay interest twice a year, at a fixed rate, and they increase in value when inflation is on the rise, and decrease when inflation retreats.