subject: Treasury Inflation Protected Securities [print this page] The government has created achievement in spending which include $108 trillion in unfunded liabilities for social security, Medicare and another universal healthcare benefits. This has put the nation on jeopardy. With the rates of interest close to zero, the Federal Reserve are not able to take one conservative action - reducing short-term rates - to bring back the weakened economy.
In this hard economic slump or double-dip recession, politicians - with the reluctant assistance of the Fed - could decide to spend still more massively to try to jump-start the financial system. The end result might be stagflation: slow growth along with higher inflation.
Inflation is the curse to the debt holders. However it is a blessing to the debtors - and Uncle Sam is the chief of them - as they can pay the fixed obligations with increasingly worthless currency.
Are you scared of rising inflation? And would like to make sure better profits over inflation from your investments at least risk? Therefore Treasury Inflation Protected Securities (TIPS) could be the most excellent investment choice for everyone.
Treasury Inflation Protected Securities (TIPS) are also known as Treasury Inflation Index Securities and Real Return Bonds (RRB). TIPS are 'safest of the safe'. There is small amount of downside risk on investing. TIPS are long-term fixed income investments protected against fluctuations in the rate of inflation.
But why use TIPS as your hedge against inflation, rather than a traditional hedge, such as precious metals? You can benefit from both as your hedge against inflation. However always remember, precious metals like gold and silver are less than ideal hedges.
Gold and silver have accomplished extremely well over the last ten years. Gold has more than quadrupled. Silver has done even better. But twenty years before that were a total disasters.
But no problem if inflation is low or high, TIPS will guard you from the risk on top of your investment. How?
Here are the benefits of buying Inflation-Protected Treasuries:
Regular Interest Payments: Just like a regular Treasury bond, TIPS reimburse interest regularly once in six months. However unlike traditional bonds, your principal grows every year by the amount of inflation, as measured by the consumer price index (CPI). That is when inflation rate is up; value of TIPS is also increased automatically. In other words, inflation protection is available on both capital and investment. The interest paid once in every six months also escalate by the amount of inflation.
Tax Advantages: The interest you receive from TIPS investments are exempted from state and local income taxes (but not federal).
TIPS are moreover less unstable when compared to the traditional bonds. The returns on these TIPS funds is at present just about 2.5% (plus whatever inflation is going ahead).
One more worthy reason to think about adding TIPS to your portfolio is the great portfolio diversification benefits they bring. This reduces the overall risk and / or instability of your portfolio over time. TIPS bond yields are little or negative correlation with the performance of many other traditional investments such as shares and regular bonds.
Growing inflation probability are good for TIPS returns, but in the short period are negative for the returns of stocks and bonds and vice versa.
TIPS can be bought in three ways:
1. Directly: It is possible to buy TIPS directly from the U.S. Treasury or through a bank, broker, or dealer. You can understand more about buying TIPS directly at http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_buy.htm
2. Through the Vanguard Inflation-Protected Securities Fund (VIPSX).
3. Through its ETF equivalent - the iShares Barclays TIPS Bond Fund (NYSE: TIP)
Buying TIPS through mutual funds offer more flexibility.
There are several advantages of buying TIPS
1. TIPS are very safe for long-term investments.
2. TIPS are outstanding ways to diversity your portfolio which minimizes whole portfolio risk.
3. TIPS are government guaranteed.
4. TIPS are less volatile than traditional bonds.
5. TIPS are beneficial when inflation rates are expected to go up also when financial system slows down.
6. Investment on TIPS involves less active investment management thus help both newbies and skilled investors.
Some traders object that TIPS hasn't done anything exciting in recent times. This isn't correct. We've been in the influence of disinflationary forces, not inflationary ones. That will not change next week or next month.
But as the deficit continues growing that makes people sad, pressure will increase on the government to do "something". That "something" possibly will be a decision to inflate our way out of this mess, rather than risk the kind of deflationary spiral that Japan has suffered over the past two decades.
Remember that:
The Fed has already taken interest rates near to zero.
Congress has by now tried a huge fiscal stimulus
The Federal Reserve has already created trillions out of thin air to mop up worthless securities.
There are chances of increase in inflation if the economy stumbles again which forces to the government to take further action, it could be even more reckless.
A few libertarians and laissez-faire capitalists will refuse to purchase TIPS. However other inflation hedges sometimes will not work. So there is no little risk taking an extra approach.
In total, TIPS is the only investment that guarantees a gain that exceeds inflation in the years to come. And it is in fact an important component of your portfolio.
