Treasury Inflation-Linked Securities are designed to protect against inflation.
As inflation pressures continue to rise, it is essential to understand how to protect our investments and savings against it.
Many set their heart on gold; however, it is not an isolated inflation play. The precious metal is sensitive to the price of the U.S. Dollar, it is often used as a geopolitical instrument, and it is sensitive to risk appetite. Research shows that investors tend to buy gold when it is at a near peak exposing holders of the precious metal to more downside than upside.
TIPS, on the contrary, are an isolated inflation play, which also provides a steady cash flow over time as inflation rises. To give you an example, if investors were putting $10,000 in 30-year inflation linkers paying a coupon of 10.45% in 1982, by 2012 they would have pocketed around $35,000 in cash flow. At maturity, the holders of TIPS would have also gotten the principal adjusted by inflation. If an investor were putting $10,000 in gold in 1982, by selling it in 2012, he would have made approximately the same money. The big difference is that he would not have received any cashflow payment during the past 30 years. Therefore, that money was tight in that one position, which otherwise could have been put at work in other investment opportunities.
Although TIPS are now expensive compared to the '80s, it is possible to say that there is plenty of appreciation opportunity ahead.
Firstly, the Federal Reserve has been increasing its ownership of the TIPS market since the beginning of the year. Many argue that the FED is trying to push TIPS prices higher to have the market believing that inflation is indeed about to come. As a consequence, TIPS prices are at record high levels, offering negative yields across the yield curve.