OPINION: Your money will lose ground against inflation if you sit holding your cash waiting for TIPS to get really cheap, BrettArends writes.
Here’s a rare breath of fresh air for retirees and older investors: Inflation-protected Treasury bonds are paying a positive rate of interest again.
In other words, if you buy a 30-Year TIPS bond today and hold it until it matures, in 2052, it is a guaranteed, fail-safe protection against inflation over that time — no matter what inflation comes along. But the reality isn’t quite so simple. TIPS bonds trade in the market, so prices can go up, making them very expensive to own, or down, making them very cheap to own. Bonds work like seesaws: When the price rises, the yield or interest rate falls.That’s what’s been happening for years. When TIPS bonds were first launched in the late 1990s, they sometimes offered yields, or interest rates, of 3 full percentage points above the rate of inflation.
The recent “good” news on TIPS is only good if you don’t already own these bonds. That’s because the reason the yields have risen is because the price has fallen. The PIMCO 15+ YEAR TIPS ETF LTPZ, +0.81%, for example, has fallen about 10% so far this year. The broader Vanguard Inflation-Protected Securities ETF, VAIPX, +0.18%, is off about 3%. But those with plenty of cash or short-term paper in their accounts have the option of buying more TIPS at today’s lower prices.
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