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TIPS Show Solid Gains Since Being Called a Sucker Bet

Even though some people (including yours truly) noted as far back as October that the concern over negative real yields of TIPS is overblown, Marketwatch.com columnist Brett Arends wrote an article in May warning investors not to buy short-term TIPS because of their negative yields. We saw why continuing to invest in TIPS could be a good strategy, but I thought it was important to see what has happened since Arends's article. I asked my Right Financial Plan co-author Kevin Grogan to take a look.

Arends' article was quite critical of anyone who would buy short-term TIPS. Below are some choice quotes from the article:

  • "The only possible scenario in which any of these short-term TIPS bonds can avoid a loss is if we get persistent price deflation."
  • "Some investment losses are unavoidable, but not this one. This one is a lock."
  • "But why are people buying short-term TIPS bonds that will actually lose them money? I suspect you can blame the usual Wall Street culprits, like investor ignorance, unscrupulous brokers, and of course, the 'dumb money.'"
The article was posted on May 6. Below is the performance of two PIMCO ETFs from May 6th thru August 19:
  • PIMCO 1-5 Year TIPS ETF (STPZ) -- 1.0 percent
  • PIMCO 1-3 Year US Treasury ETF (TUZ) -- 0.8 percent
Not only have TIPS provided a positive return since the article was posted, PIMCO's short-term TIPS ETF has outperformed its short-term nominal treasury ETF. What about the claim that short-term TIPS could only have positive returns in a deflationary environment? Inflation for May and June was 0.4 percent, so this certainly wasn't a deflationary time. I guess this wasn't such a "lock."

Making matters worse, if you invested in longer-term TIPS your return was even higher. The PIMCO Broad US TIPS ETF (TIPZ) that has an average maturity of about 10 years returned 7.4 percent from May 6-August 19. The PIMCO 15+ Year ETF (LTPZ) returned 16.1 percent over the timeframe.

The point I made back in October still holds: you can't simply look at TIPS yields in isolation. You need to compare TIPS yields to nominal Treasury yields of the same maturity. If you make this comparison, you would notice that the breakeven inflation rate hasn't changed much in the past year.

More on MoneyWatch:
Why Buying Money-Losing Investments Can Be a Good Strategy Why the Concern Over Negative TIPS Yields Is Overblown How to Build a Diversified Portfolio GNMAs: You Can Do Better This Time, It Actually Is Different
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