The long and short of TIPS

October 11, 2012

 
 
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Since the introduction of U.S. Treasury inflation-protected securities (TIPS) in 1997, broad-market TIPS have generally acted as an "inflation hedge" by securing assets' long-term purchasing power or tracking realized inflation over shorter horizons. Still, with a longer duration than the nominal U.S. Treasury market, the aggregate U.S. TIPS market carries considerable interest risk.

A new Vanguard research paper, The long and short of TIPS, by Joseph Davis, Roger Aliaga-Díaz, Charles Thomas, and Nathan Zahm, all of Vanguard Investment Strategy Group, compares the correlation of U.S. inflation with short-, intermediate-, and long-term TIPS benchmarks to assess the impact of a portfolio's maturity on inflation protection and sensitivity. Data show that the risk-return trade-offs in allocating between TIPS portfolios of alternative maturities parallel those involved when selecting the interest rate exposure of any other bond portfolio.

 

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Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • Past performance is no guarantee of future returns.
  • Investments in bonds are subject to interest rate, credit, and, for nominal bonds, inflation risk.
  • While U.S. Treasury or government agency securities provide substantial protection against credit risk, they do not protect investors against price changes due to changing interest rates. Unlike stocks and bonds, U.S. Treasury bills are guaranteed as to the timely payment of principal and interest.
 
 
 
 
 
 
 

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