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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