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Investors turn to TIPS as inflation concerns persist despite easing prices: factors to consider before investing

by admin February 22, 2025
February 22, 2025
Investors turn to TIPS as inflation concerns persist despite easing prices: factors to consider before investing

Although inflation has eased from its peak, it remains a concern for investors and policymakers alike.

The consumer price index (CPI) has fallen from a 9.1% high in June 2022 to 3% in January, but it remains above the Federal Reserve’s 2% target.

“The progress toward 2% inflation has stalled out, and the Fed knows it,” said Greg McBride, chief financial analyst at Bankrate.com.

Some Fed officials are also wary of the impact that tariffs could have on inflation in the months ahead.

With inflation still a key issue, investors looking to preserve their purchasing power are turning to Treasury Inflation-Protected Securities (TIPS) as a potential safeguard, a report by CNBC said.

What are TIPS and how do they work?

TIPS are issued by the US government and function similarly to standard Treasury bonds but with a key difference: their principal value adjusts with inflation.

When inflation rises, so does the bond’s principal, ensuring that investors retain their purchasing power.

By contrast, regular Treasury bonds and certificates of deposit (CDs) may lose value in real terms if their yields fail to keep pace with inflation.

The benchmark 10-year Treasury bond is currently yielding just under 4.5%, a rate that could struggle to outpace inflation in the long run.

TIPS are available in 5-, 10-, and 30-year maturities.

When they mature, investors receive either the adjusted principal or the original principal, whichever is higher.

Interest payments, calculated based on the adjusted principal, increase as inflation rises.

Growing investor interest in TIPS

Recent concerns over tariffs and potential inflationary pressures have led to renewed interest in TIPS, according to a report by Wells Fargo Investment Institute.

“TIPS continue to be a valuable tool for protecting purchasing power in an inflationary environment,” said Douglas Boneparth, president of Bone Fide Wealth.

“With yields currently near decade highs, they’re certainly more attractive than in recent years.”

However, TIPS are not without risk.

Colin Gerrety, a client advisor at Glassman Wealth Services, pointed to 2022 as an example of how rising interest rates can negatively impact TIPS returns.

“Let’s say inflation spikes and interest rates rise at the same time,” he explained.

“TIPS might actually lose money if the negative impact from the rise in rates exceeds the adjustment that occurs due to inflation.”

Indeed, TIPS had a negative 11.85% return in 2022, though they still outperformed standard US Treasurys.

How to accommodate TIPS into a broader strategy

As investors weigh their options, some experts recommend a diversified approach that combines TIPS with other income-generating assets.

Winnie Sun, managing director of Sun Group Wealth Partners, advises a mix of fixed-income TIPS, dividend-paying stocks, and laddered CDs to balance risk and return.

“I usually advise clients to view TIPS as one part of a diversified portfolio rather than a standalone solution,” said Boneparth.

While TIPS offer inflation protection, investors must also consider tax implications and the potential for lower returns if inflation moderates.

As the Federal Reserve continues to monitor inflation trends, the role of TIPS in an investment portfolio remains an important consideration for those looking to safeguard their assets.

The post Investors turn to TIPS as inflation concerns persist despite easing prices: factors to consider before investing appeared first on Invezz

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