⚡ (9 Inflation trending lower) - TIPS Performance
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Just like traditional nominal Treasury securities, Treasury Inflation-Protected Securities (TIPS) are issued with a defined coupon rate that does not change over the course of the bond’s life.
TIPS PERFORMANCE SINCE 2013
Simply put, the market value of a standard nominal U.S. Treasury security fluctuates based on changes in market yield.
TIPS, however, have two primary components that impact price - inflation expectations and market yield.
Many investors focus on the inflation expectation component of TIPS and underestimate the power interest rate movements have on TIPS performance.
INFLATION TREND
Our expectation is that inflation will move lower next year as the economy weakens, then move higher later in the year as the economy recovers.
With the FED focused on bringing inflation back down to its 2% target, we expect that inflation will continue to drift lower.
RELATIONSHIP BOND PRICES AND BOND YIELDS
It is important for investors to remember that the inverse relationship between bond prices and bond yields generally holds true for TIPS as well.
This relationship is most pronounced in longer maturity securities. Most TIPS tend to be longer duration securities.
The strong influence of duration (a measure of a bond’s interest rate sensitivity) in TIPS returns can be seen in the chart - which demonstrates that TIPS total return often has been most impacted by the movement of long-term interest rates.
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Disclosure
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.