Articles for Financial Advisors

TIPS Concerns

TIPS Concerns

Treasury inflation-protected securities (TIPS) are issued by the U.S. Treasury and are designed to keep pace with CPI increases. The first TIPS were issued in 1997. TIPS comprise two parts: a real return and a CPI adjustment every six months. The “moving part” is the CPI change. The “real return” is a locked-in rate that stays the same until the maturity date. Investors earn a fixed rate of interest on an ever-increasing amount of principal.

 
Some analysts believe TIPS are only a good idea when the real return (locked-in rate) is 2% or more per year. As of February 2013, 30-year TIPS were offering a 0.5% real return (plus an inflation adjustment of face value every six months). Five-year TIPS had a real return of -1.4% annually. This means that if inflation were to average 0% over the next five years, the investor would lose 7% of principal (-1.4% per year for five years).
 
In February 2010, the February 2040 was issued and has had a total return of 40% over three years. Since 2003, 10-year TIPS real returns have ranged from just over 3% (late 2007) to as low as -1% (late 2012). 
 

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