Time to Revisit TIPS

One of the side-effects of the recent market tumult is the drop-off in demand for government securities tied to inflation or TIPS.

As a result, prices have dropped and real yields are back above 2%, the recommended minimum to offset expenses and tax implications.

According to the Wall Street Journal, the yields on 10- and 20- year TIPS jumped to recent highs of 2.3% and 2.6% last week after factoring in inflation, from 1.2% and 1.8% respectively, just six months ago.

With asset and commodity prices dropping, near term inflation expectations are very low if not negative.  However, the massive printing of money by central banks around the world to address the credit crisis will eventually create a new inflation threat that investors will need to address.

The Barclays Capital TIPS Bond Fund (TIP) had a real yield of 1.97% as of October 2 and an effective duration of 6.78 years.  The SPDR Barclays Capital TIPS ETF (IPE) had a current yield of 2.31% as of October 7 and an effective duration of 7.6%.

For more on inflation protected securities, see the Keeping Up post Inflation ETFs – Investor TIPS.

For a complete listing of TIPS ETFs, see the ETF Directory.