Watch your TIPS!
Barron’s published an article on June 12, entitled TIPS Are The Pits, that may have felt like a slap in the face for some investors.
The story reminded us that we sometimes complacently regard an investment as safe and reliable, when in fact it should cause worry.
Gold comes to mind. The precious metal has become problematic, especially if you own it and are unaware that its price has been in decline for almost two years. Suddenly realizing your investment is down almost 30 percent when you wake up from a two-year nap is no fun.
But if you are that unaware, then you probably should not have owned gold in the first place (although I still think the long-term outlook is positive).
But the Barron’s piece didn’t address gold, it addressed TIPS, also known as Treasury Inflation Protected Securities.
And if you own TIPS, just like gold investors, you should know that they have been in decline for the last six months or so.
You see, TIPS are Treasury securities and they pay interest but they also get a value adjustment that is based upon the rate of inflation.
In other words, to make money on them inflation should be on the rise and interest rates should be stable or falling but definitely not going up.
And like other Treasury securities these days, TIPS’ value have been on the decline because of the improving economy (driving rates higher) and the supposition that the Fed will begin to unwind the massive quantitative easing (QE) that has been in effect for almost five years.
But despite the economy seemingly on the mend, there really is no inflation to speak of.
So it’s kind of a double-edged sword of negative influence: rates are expected to rise, suppressing bond prices while inflation is expected to stay muted, providing no value increases for TIPS.
If you own TIPS or a TIPS fund, you’ve already felt the impact and hopefully you’ve been considering what to do about it.
Take the iShares Barclays TIPS Bond Fund (TIP) which the Barron’s article also references. It had an intraday peak of $123.44 on December 6, 2012 and is trading below $114.00 per share today. That’s a decline of about 8 percent.
But the exchange-traded fund (ETF) only yields 2.75 percent and with the aforementioned factors in play the fund could have more downside ahead of it.
Looking at the fund’s history back before the 2008 financial crisis began, we see that the ETF had been trading at about $100.00 per share, more than 10 percent lower than it is today.
If you believe higher inflation is headed our way, then maybe you can make an argument to hang in there. But given the market’s belief that QE may be coming to an end, I’d suggest rethinking your position.
One consideration is to hedge your long TIPS position or, for more speculative investors, flat out betting against TIPS. Both of these strategies can be accomplished with a fund like the ProShares UltraShort TIPS ETF (TPS).
The fund is inversely correlated to the direction of individual TIPS as well as funds like TIP. If TIPS continue to decline then TPS will rise, offsetting losses incurred in your TPS while allowing you to continue to receive the interest payments.
Of course, there are experts with contrasting opinions regarding the usefulness of TIPS and the future direction of the securities. Some say keep them because inflation is coming (especially if the economy continues to strengthen), while others say TIPS have never done what they were supposed to and that there are better ways to invest your money.
I’m kind of on the fence about TIPS’ ultimate usefulness, but right now I think the greater risk is for additional losses for TIPS investors.
For one, I do not see inflation on the horizon. It may be coming, but when? Next year, or perhaps the year after? In five years?
But I do see yields rising whether or not the Fed begins to unwind QE—and that means lower bond prices, including those of TIPS.
I don’t own individual TIPS or a fund like TIP. If I did, and if you do, I’d definitely consider hedging that position with a fund like TPS.
Steven Orlowski is a 20-year veteran of the investment business. He has worked for some of the most prestigious firms in the world in a variety of capacities, including portfolio manager, trader and high net worth financial planner.
The story reminded us that we sometimes complacently regard an investment as safe and reliable, when in fact it should cause worry.
Gold comes to mind. The precious metal has become problematic, especially if you own it and are unaware that its price has been in decline for almost two years. Suddenly realizing your investment is down almost 30 percent when you wake up from a two-year nap is no fun.
But if you are that unaware, then you probably should not have owned gold in the first place (although I still think the long-term outlook is positive).
But the Barron’s piece didn’t address gold, it addressed TIPS, also known as Treasury Inflation Protected Securities.
And if you own TIPS, just like gold investors, you should know that they have been in decline for the last six months or so.
You see, TIPS are Treasury securities and they pay interest but they also get a value adjustment that is based upon the rate of inflation.
In other words, to make money on them inflation should be on the rise and interest rates should be stable or falling but definitely not going up.
And like other Treasury securities these days, TIPS’ value have been on the decline because of the improving economy (driving rates higher) and the supposition that the Fed will begin to unwind the massive quantitative easing (QE) that has been in effect for almost five years.
But despite the economy seemingly on the mend, there really is no inflation to speak of.
So it’s kind of a double-edged sword of negative influence: rates are expected to rise, suppressing bond prices while inflation is expected to stay muted, providing no value increases for TIPS.
If you own TIPS or a TIPS fund, you’ve already felt the impact and hopefully you’ve been considering what to do about it.
Take the iShares Barclays TIPS Bond Fund (TIP) which the Barron’s article also references. It had an intraday peak of $123.44 on December 6, 2012 and is trading below $114.00 per share today. That’s a decline of about 8 percent.
But the exchange-traded fund (ETF) only yields 2.75 percent and with the aforementioned factors in play the fund could have more downside ahead of it.
Looking at the fund’s history back before the 2008 financial crisis began, we see that the ETF had been trading at about $100.00 per share, more than 10 percent lower than it is today.
If you believe higher inflation is headed our way, then maybe you can make an argument to hang in there. But given the market’s belief that QE may be coming to an end, I’d suggest rethinking your position.
One consideration is to hedge your long TIPS position or, for more speculative investors, flat out betting against TIPS. Both of these strategies can be accomplished with a fund like the ProShares UltraShort TIPS ETF (TPS).
The fund is inversely correlated to the direction of individual TIPS as well as funds like TIP. If TIPS continue to decline then TPS will rise, offsetting losses incurred in your TPS while allowing you to continue to receive the interest payments.
Of course, there are experts with contrasting opinions regarding the usefulness of TIPS and the future direction of the securities. Some say keep them because inflation is coming (especially if the economy continues to strengthen), while others say TIPS have never done what they were supposed to and that there are better ways to invest your money.
I’m kind of on the fence about TIPS’ ultimate usefulness, but right now I think the greater risk is for additional losses for TIPS investors.
For one, I do not see inflation on the horizon. It may be coming, but when? Next year, or perhaps the year after? In five years?
But I do see yields rising whether or not the Fed begins to unwind QE—and that means lower bond prices, including those of TIPS.
I don’t own individual TIPS or a fund like TIP. If I did, and if you do, I’d definitely consider hedging that position with a fund like TPS.
Steven Orlowski is a 20-year veteran of the investment business. He has worked for some of the most prestigious firms in the world in a variety of capacities, including portfolio manager, trader and high net worth financial planner.