Despite two good years for Treasury Inflation-Protected Securities, or TIPS, a dramatic rise in real yields may be cause for investors to reexamine their potential for 2022.

Read more about this episode:

Never miss a Morgan Stanley video. Subscribe to our YouTube channel now:
_________________________________________________________________________
Or you can subscribe to Thoughts on the Market directly on Apple or Spotify.

Apple Podcasts:

Spotify Podcasts:…(read more)

LEARN MORE ABOUT: Treasury Inflation Protected Securities

REVEALED: Best Investment During Inflation

HOW TO INVEST IN GOLD: Gold IRA Investing

HOW TO INVEST IN SILVER: Silver IRA Investing

Matt Hornbach, the global head of interest rate strategy at Morgan Stanley, is urging investors to take a closer look at the yields being offered by Treasury Inflation-Protected Securities (TIPS). In a recent research note, Hornbach emphasized the need for investors to “get real” when it comes to understanding the actual returns they can expect from TIPS.

TIPS are bonds issued by the U.S. government that offer investors protection against inflation. Unlike traditional bonds, the principal of TIPS is adjusted for inflation, so investors receive a higher payout if prices rise. While this feature makes TIPS an attractive investment for those concerned about inflation, Hornbach warns that investors need to be realistic about the yield they can expect from these securities.

The problem with TIPS, according to Hornbach, is that their yields have been artificially inflated by rising breakeven inflation rates. Breakeven inflation is the difference between the yield on a TIPS bond and the yield on a traditional Treasury bond of the same maturity. It represents the amount of inflation that investors expect over the life of the security.

Breakeven inflation rates have been rising in recent months due to a number of factors, including expectations of higher inflation as the economy recovers from the pandemic and concerns about government spending and the Federal Reserve’s monetary policy. However, Hornbach argues that these expectations are likely overblown and that investors should be cautious about chasing high yields that may not materialize.

To illustrate his point, Hornbach compared the yields on TIPS to those on traditional Treasury bonds. He noted that while TIPS are currently offering nominal yields of around 0.5%, the yields on traditional Treasury bonds of the same maturity are negative. This means that investors are effectively paying the government to hold their money, a situation that is unlikely to persist over the long term.

Hornbach’s advice to investors is to take a more realistic view of the returns they can expect from TIPS. He suggests that investors focus on the real yield, which is the yield adjusted for inflation. Currently, real yields on TIPS are negative, meaning that investors are effectively losing money in real terms.

While Hornbach is not necessarily advocating that investors steer clear of TIPS altogether, he is urging caution and a reevaluation of expectations. He notes that TIPS can still play a role in a diversified portfolio, but that investors should be mindful of the risks and not overestimate the potential returns.

In the end, Hornbach’s message is a simple one: investors need to get real when it comes to TIPS. While these securities may offer some protection against inflation, investors should not be swayed by artificially inflated yields and should focus on the real returns they can expect over the long term. By taking a realistic view and being mindful of the risks, investors can make more informed decisions about whether TIPS are right for their portfolio.