2024-03-11 16:44:26 ET
Summary
- TIPS real rates are close to the highest level of the past 14 years, making them attractive for income-oriented investors who seek capital preservation.
- However, elevated risks raise the question of how they might perform under adverse financial conditions.
- We explore three such scenarios and how TIPS might fare.
- Surprises can and do happen, even for the world’s best investors.
This is a follow-up to my previous TIPS articles, the most recent being Revisiting TIPS Returns in the Decade Ahead . TIPS real yields have come down from last October, but are still near 14-year highs, with the 10-year at 1.81%. The 10-year nominal Treasury bond yield is 4.13%, resulting in a breakeven inflation rate of 2.32%. If inflation exceeds this level, TIPS held to maturity will earn more than nominal Treasuries. It looks like a reasonable bet given the current inflation of 3.1% and the 30-year average rate of 3.8%.
However, there are some troubling factors. Elevated stock market valuations, weakening economic indicators, enormous federal debt, domestic and global unrest, and signs of a Fourth Turning should give pause to all but the most aggressive investors. My investment orientation is capital preservation, with a contrarian and value bent. I carry a substantial allocation to TIPS in my all-weather portfolio as described in my SA articles....
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For further details see:
How TIPS Might Perform At Financial Extremes