Investors, from beginners to veterans, are looking for safety these
days, as they've seen their retirement and investment accounts
plummet. Many investors have been putting their money in Treasury
bonds, which are a safe haven. But some economists think that
regular Treasuries have actually formed a kind of bubble, as demand
has increased the yield on the bonds and decreased the price.
Many leading bond managers are turning to a
variation of plain-vanilla Treasury bonds that are not yet
overvalued. Although deflation is a much bigger concern right now
than inflation, the hottest investments in the government bond
market are securities that protect debt holders against rising
consumer prices. These bonds, called TIPS, for short, are getting
snapped up now by some of the best bond experts in the business.
You can buy them most easily through an ETF, with the stock ticker
TIP.
The bond wizards note that U.S. Treasury
Inflation-Protected Securities, or TIPS, are underpriced, despite
the outlook in the short term for deflation. Mihir Worah, the
manager of Pimco Real Return Fund (PRTNX), a bellwether of bond
funds, is bracing for deflation and sees consumer prices slumping
this year and into 2010. But deflation isn't Worah's
biggest concern, as he recently told Marketwatch. Instead, he's
placing his shareholders' money in
TIPS.
Why
would anyone buy inflation-protected bonds, or mutual-funds and
exchange-traded funds that specialize in them, when inflation
appears to be fading fast? In fact, that's the real appeal
nowadays of Treasury Inflation Protected Securities, or TIPS, which
help maintain the purchasing power that inflation erodes. TIPS
offer a fixed yield plus the inflation rate to keep pace with
changes in the consumer price index.
With the market focused on deflation, the
inflation insurance TIPS provide is cheap. And smart shoppers know
the best time to buy insurance is before you actually need it. Said
Worah: "2009 is going to see negative inflation, but we're
not going to see no inflation or low inflation for the next 10
years."
Similarly, Pacific Investment Management
Co., Vanguard Group and Fifth Third Asset Management, which oversee
a combined $1.8 trillion, are scooping up so-called linkers on
speculation efforts by policy makers to reignite the global economy
will lead to faster inflation than is currently priced into the
securities. Yields on U.S. Treasury Inflation-Protected
Securities, or TIPS, indicate almost no rise in consumer prices for
the next decade.
A plain 10-year Treasury yielded about 2.9%
late last week, while its inflation-linked counterpart -- also U.S.
government backed -- yielded about 1.6%. The narrow gap in yield,
or spread, implies that inflation over the next decade will average
just over 1% a year. Yet U.S. inflation historically averages
between 2% and 3% annually.
At the current yield, 10-year TIPS will be
better bets than conventional Treasurys if inflation during that
time tops about 1.3% -- the so-called breakeven rate. (With
deflation or inflation below breakeven, nominal Treasurys would
outperform TIPS.) Still, that's a pretty good deal for
long-term oriented buyers, who are concerned that the
government's frantic spending to spur the economy will
eventually result in strong inflation in coming years.
So if you're looking for a fairly safe,
dividend-paying long-term investment, you might consider
TIPS.
Some TIPS on Surviving the Downturn
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