While Treasury inflation-protected securities (TIPS) may seem complex and daunting, it’s important to dive into their intricacies. After all, their current yields present an enticing opportunity and a compelling alternative to conventional Treasury bonds.
Treasury inflation-protected securities yields consist of two key elements: an inflation adjustment linked to the consumer price index and a real yield, providing an additional bonus beyond the inflation rate. The real yield has surged to almost 2.5%, its highest point in 15 years.
Amid inflation surpassing 3%, certain TIPS now boast yields of around 6%. The ultimate gains for TIPS investors, spanning maturities of up to 30 years, hinge on the trajectory of future inflation rates.
“The real yield is getting back to abnormally high levels,” Research Associates Founder Rob Arnott told Barron’s. “Looking at 10- and 30-year TIPS and 10- and 30-year Treasuries, the easy choice is to own TIPS. Inflation is more of a risk than the markets give it credit for.”