{"id":1646,"date":"2023-10-16T21:53:58","date_gmt":"2023-10-16T21:53:58","guid":{"rendered":"https:\/\/connectwithfund.com\/markets\/how-to-beat-inflation-these-bonds-will-help\/"},"modified":"2023-10-16T21:53:59","modified_gmt":"2023-10-16T21:53:59","slug":"how-to-beat-inflation-these-bonds-will-help","status":"publish","type":"post","link":"https:\/\/connectwithfund.com\/?p=1646","title":{"rendered":"How to Beat Inflation? These Bonds Will Help."},"content":{"rendered":"
\n
<\/p>\n

<\/p>\n

<\/p>\n<\/figure><\/div>\n

It\u2019s an underappreciated asset class that offers investors one of the few direct ways to protect themselves against rising inflation.<\/p>\n

Treasury inflation-protected securities are a little complex, but they\u2019re worth understanding because their yields now look appealing and they offer a good alternative to ordinary Treasury bonds.<\/p>\n

\n

There are two components to TIPS yields: an inflation adjustment, which tracks the consumer price index, and what\u2019s known as the real yield, which amounts to a bonus above the inflation rate. The real yield is now almost 2.5%, the highest in 15 years. With inflation running at more than 3%, some TIPS now offer yields of about 6%. The ultimate return to investors in TIPS, which have maturities as long as 30 years, will depend on the future inflation rate.<\/p>\n

\u201cThe real yield is getting back to abnormally high levels,\u201d says Rob Arnott, the founder of Research Associates. \u201cLooking 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.\u201d<\/p>\n

The so-called break-even inflation rate between regular Treasuries and TIPS is now about 2.35% over the next five, 10, and 30 years. That means investors will do better in TIPS versus regular Treasuries if inflation runs at more than 2.35%. <\/p>\n

The markets are betting that the Federal Reserve will succeed in getting inflation down close to its 2% target. But inflation remains sticky at more than a 3.5% rate over the past 1\u00bd years, and it could remain elevated due to a tight labor market and other factors.<\/p>\n

TIPS bond prices have been hit hard, along with regular Treasuries, in the past two years. That has soured some investors on the $2 trillion sector. While TIPS holders have benefited from higher inflation, the bonds have lost value, reflecting the sharp rise in real yields from negative 1% in early 2022. But real yields may be close to peaking even if Treasury yields rise. <\/p>\n

<\/p>\n

<\/p>\n

\n
\n\n\n\n\n\n\n\n\n\n
ETF \/ Ticker<\/th>\nRecent Price <\/th>\nYTD Return<\/th>\nCurrent Yield<\/th>\n<\/thead>\n
iShares TIPS Bond \/ TIP<\/b><\/td>\n$103.37<\/td>\n-0.70%<\/td>\n5.90%<\/td>\n<\/tr>\n
iShares 0-5 Year TIPS Bond \/ STIP<\/b><\/td>\n$96.89<\/td>\n2.2<\/td>\n6.1<\/td>\n<\/tr>\n
PImco 15+ Year U.S. TIPS \/ LTPZ<\/b><\/td>\n51.82<\/td>\n-8.1<\/td>\n5.3<\/td>\n<\/tr>\n
Vanguard Short-Term Inflation-Protected Securities \/ VTIP<\/b><\/td>\n46.99<\/td>\n2.2<\/td>\n2.8<\/td>\n<\/tr>\n
Closed-End Fund \/ Ticker<\/b><\/td>\n <\/td>\n <\/td>\n <\/td>\n<\/tr>\n
Western Asset Inflation-Linked Opportunities & Income \/ WIW<\/b><\/td>\n8.17<\/td>\n-3.0<\/td>\n8.9%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Sources: Bloomberg, CEF Connect, company reports<\/p>\n<\/div><\/div>\n<\/p><\/div>\n

Real yields got close to 3% in the early 2000s, and that could be a ceiling because investors who don\u2019t normally purchase a lot of bonds could be buyers at that level, including pension funds.<\/p>\n

One of the best ways to get exposure to the market is through low-fee exchange-traded funds. Investors can also purchase TIPS directly from the Treasury and through banks and brokerage firms.<\/p>\n

ETFs include the $52 billion
\n Vanguard Short-Term Inflation-Protected Securities
\n (ticker: VTIP), the largest TIPS ETF, and the similar
\n iShares 0-5 Year TIPS Bond
\n (STIP). The
\n iShares TIPS Bond
\n (TIP) and
\n Pimco 15+ Year U.S. TIPS
\n (LTPZ) ETFs hold longer-maturity TIPS. The shorter-maturity Vanguard ETF and the iShares 0-5 TIPS ETF have returned about 2% this year, while the Pimco fund is down 8%. If real yields fall, the Pimco fund could rise sharply because of its keen sensitivity to rate changes.<\/p>\n

Another option is the $600 million
\n Western Asset Inflation-Linked Opportunities & Income
\n closed-end fund (WIW), which has 80% of its assets in TIPS and other inflation-linked bonds. It offers a yield of nearly 9% (reflecting leverage) and trades at a 15% discount to its net asset value.<\/p>\n

TIPS are tricky from a tax perspective. The portion of the interest rate that is based on the inflation component is added to the principal value of the bond. This leads to so-called phantom income, which is subject to income taxes. For this reason, individual TIPS can be better suited to tax-advantaged accounts.<\/p>\n

ETFs offer advantages over direct investment in TIPS, including better liquidity, monthly income (versus semiannual on TIPS), and no phantom income. Fees are low, with the Vanguard and shorter-dated iShares ETFs charging less than 0.05% a year, and the longer-dated iShares and the Pimco ETFs, about 0.2%.<\/p>\n

Write to <\/strong>Andrew Bary at andrew.bary@barrons.com<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

It\u2019s an underappreciated asset class that offers investors one of the few direct ways to protect themselves against rising inflation. Treasury inflation-protected securities are a little complex, but they\u2019re worth understanding because their yields now look appealing and they offer a good alternative to ordinary Treasury bonds. There are two components to TIPS yields: an inflation adjustment, which tracks the consumer price index, and what\u2019s known as the real yield, which amounts to a bonus above the inflation rate. The real yield is now almost 2.5%, the highest in 15 years. With inflation running at more than 3%, some TIPS<\/p>\n","protected":false},"author":1,"featured_media":1647,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[39],"tags":[],"class_list":["post-1646","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-markets"],"yoast_head":"\nHow to Beat Inflation? These Bonds Will Help. | ConnectWithFund<\/title>\n<meta name=\"description\" content=\"It\u2019s an underappreciated asset class that offers investors one of the few direct ways to protect themselves against rising inflation. 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