TIPS
The Return Of Returns
A distinguishing feature of fixed income securities is that the expected return on a bond over its remaining lifetime is known with considerable certainty at the time of purchase. This characteristic can be a blessing or a curse, the negative aspect coming into play during an asset price bubble. Equity investors can justify almost any price as they dream of boundless riches arising from the bubble’s driving theme, limited only by their imagination. However, a bond’s yield to maturity is known at the time of purchase and this is the return investors in aggregate will earn. Even during the euphoria of an asset bubble, the expected outcome - the return of par value at maturity - is also the best-case outcome, and that is where our story begins.
Tips On TIPS (Treasury Inflation Protected Securities)
TIPS can serve a useful purpose in investment portfolios by protecting purchasing power and diversifying risk. But at current low yields and falling bond prices, they do not offer very substantial returns, unless there is an unexpected surge in CPI inflation over the life of the bond.
Bond Market Summary
Long treasuries are still well above the underlying interest rate (real rate of 4%-5%). The inflation outlook remains tame.