With yields rising and fears over long-term inflation, TIPS can benefit a fixed income allocation.
Treasury yields have perked up recently with the US Treasury 30YR Yield Index (TYX) hitting 5.15% last week, its highest level since 2007. Investors are still worried about long-term inflationary pressures, particularly further than 10 years out. The market yield on US Treasury securities at 30-year constant maturity, inflation-indexed is 2.77%. This represents the yield above inflation, otherwise called the real yield. The defining feature of US Treasury inflation-protected securities or TIPS for short is that the principal is protected against inflation. For example, if an investor bought a $1000 par TIP at issuance and inflation was 2% for the year, then the year end principal value would be $1020. On top of that, the TIP would pay interest on the value of the adjusted principal (2.77% if one purchased a 30YR TIP today). If held to maturity, the investor would receive coupons that grew with inflation each period as well as the greater value of either the original principal or the inflation adjusted principal amount. In the graph below, we can see that the 30YR TIP yield is at its highest level since they were brought back in 2010.
TIPS aren’t for everyone, but for those that need income and are at or near retirement they could fit in nicely with their current yields. One key aspect is that investors need to keep in mind is that TIPS ETFs are not holding these securities until maturity and are usually targeting exposure to a specific area of the yield curve. Therefore, it will often be better to go out and buy the bonds themselves for clients based on their needs with the expectation of letting them mature. However, if an exchange traded vehicle is preferred, the iShares Barclays US Treasury Inflation Protected Securities ETF (TIP) could be considered. While it has a poor fund score of 1.08, it has been in a positive trend since 2024 and trades on two consecutive buy signals. Fixed income has been at the bottom of our asset class rankings for years, but it is still a necessary part of many portfolios. With the inflation protection feature and yields at high levels, TIPS could fit nicely into a portfolio given the right circumstances.
