Inflation Causes TIPS to Drop

by | Mar 31, 2023 | Inflation Hedge | 31 comments




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What is the best investment that one can make when inflation is happening? Well, many people think that the answer to that question is, “TIPS” (Treasury, inflation protected securities).

Because while a regular Treasury is a bond that pays an interest rate and it’s usually like right now below the rate of inflation, that means that you’re getting paid a negative real return on your money. Something like a tip, a treasury inflation protected security is supposed to pay you a positive real rate because it’s protected from inflation.

However, this year, TIPS have had some lackluster performance, to say the least. And we’re going to dive into why.

Timecodes
0:00 Video Overview
0:42 Intro
0:49 Bad Performance of TIPS
1:56 Annual Increase in TIPS Still Low
4:49 Getting Involved with ‘I’ Bonds
5:30 Outro

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Treasury Inflation-Protected Securities, commonly known as TIPS, are US Treasury bonds designed to protect investors from inflation. These securities adjust their principal value with changes in the Consumer Price Index (CPI), which measures the average price of goods and services consumed by households.

TIPS work on the premise that an investor would not be able to purchase the same amount of goods and services with the same amount of money in the future due to inflation. They are meant to provide an inflation hedge and protect the investor’s purchasing power.

When inflation is on the rise, TIPS should perform well, and investors should flock to their safety to safeguard their investments. However, recently, TIPS dipped on inflation, and this development has been significant and surprising.

The dip is significant because it is an indication of investor sentiment towards inflation. TIPS have been the go-to security for investors looking to hedge against inflation for years. Inflation expectations have been rising globally due to a variety of factors, including a robust economic recovery, central bank stimulus measures, and supply chain disruptions.

However, despite these factors, TIPS yields have fallen or remained steady over recent months. This development is a clear indication that investors are not overly concerned about inflation’s effect on their investments.

See also 

There are several reasons why TIPS have dipped on inflation. Firstly, the Federal Reserve has been clear that it deems any inflation to be transitory. This stance by the Fed is based on the theory that the current spike in prices is due to temporary factors such as supply chain disruptions and pent-up demand as the economy reopens from the pandemic. The Fed has stated that inflation will return to pre-pandemic levels once these factors normalize.

Secondly, investors believe that there may be a potential slowdown in the economic recovery, which could reduce inflationary pressures. This sentiment may be because of rising COVID-19 cases worldwide, leading to renewed lockdowns and restrictions, which could slow down economic growth.

Lastly, investors may be pricing in the possibility of the Fed tightening monetary policy in the future to control inflation. The Fed could potentially raise interest rates or taper its asset purchase program, which would reduce the amount of cash flowing in the economy and put downward pressure on inflation.

In conclusion, TIPS dipping on inflation is a significant development that indicates investor sentiment towards inflation. It is an indication that investors are not overly concerned about inflation and believe it to be transitory. However, the situation is fluid and could change at any time, and investors need to monitor their investments closely.

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31 Comments

  1. kim young

    Inflation hits people a lot harder than a crashing stock or housing market as it directly affects people's cost of living that people immediately feel the impact of. It's not surprising negative market sentiment is so high now. We really need help to survive in this Economy. The fin-Market;s have underperformed the U.S. economy as fear of inflation hammers the prices of stock;s and bonds. My portfoliio of $250k is down to $192k any recommendation;s to scale up my return;s during this crash will be highly appreciated.

  2. mc

    Feels "scam-ish" for them to market these investments as "inflation protected". Call Gary? Thanks for the content, great video as always!

  3. Jin Kee

    we need a bond denominated in Big Macs

  4. tww

    Fed's killing alot of things

  5. jmcmob

    Thank you very much…

  6. Blue Barry

    We have over $19000 in a bank savings account. Last month we received $.14 of interest but the the bank took $.03 tax. Any ideas where to put it to make more interest or what to buy. Keep in mind that we are in our 70’s and don’t want to tie it up for long term investment

  7. Batman

    Thanks buddy

  8. Jin Kee

    how can they keep caling them inflation protected when they have all the protection of an upcycled trojan condom?

  9. Pravin

    I just want more bitcoin & TSLA

  10. Wes Cam

    I-bonds are a great investment when used carefully in an investment portfolio. Like only equities these bonds will maintain the value or purchasing power of the money invested in them, and are the only bonds capable of doing so. Thus, if held to maturity, they can effectively guarantee your money invested in them will have the same purchasing power and value as it had when the bond was purchased.

  11. Wes Cam

    With respect to I-Bonds, these bonds actually do not pay interest. Instead, the principle is adjusted upwards so that the value it is at any point in time is equivalent to the purchasing power that the original investment was at the time the I-Bond was purchased. Thus the principle in this Bond is always maintained in terms of its purchasing power. This is the only Treasury bond meant for this purpose. TIPS have a much different purpose and thus function much differently. The I-Bond and TIPS, then, are very different inflation protected treasury bonds. It is important to make this distinction. I-Bonds interest rates paid are meant to adjust and maintain the principle's value or purchasing power. This is why during the past 6 months I-bonds paid a higher rate than the rate of inflation. The next six months will pay a lower rate than the rate of inflation. But, taken together at approximately 9% for the past six months and 6% for the next six months the value of the principle will even out to close to the 8%'s real inflation rate in terms of purchasing power. It is for this reason that the rate paid on these bonds sometimes may be greater and then lower than the actual rate of inflation.

  12. Wes Cam

    I liked the interaction between the graphic screen and your speaker screen in this video. The constant switching back and forth when and only when the graphic was relevant made the video much more pleasant to view. Leaving the graphic on, even when you are no longer speaking about it, is distracting. Well done.

  13. Andy McGowan

    The 9.62% rate for I Bonds is gone, you had to buy by Friday the 28th. The new VARIABLE rate is rumored to be like 6.5% for the next 6 months. Barron's has been speculating though that the I bonds may get a .75-1.5% FIXED rate though so cross your fingers. (Fixed rate + Variable rate = I bond Rate)

  14. James Simmons

    Note a huge difference between TIPS and I Bonds is that for I Bonds the principle remains the same and the interest rate is reset every 6 months. For TIPs the interest rate stays the same and the principle is adjusted. Also I Bonds can be sold after a year but that is not the true for TIPs if I remember right. BTW the dead line for I Bonds at 9% has past. I believe they will be adjusted to ~6%. I bought some I Bonds a few weeks ago. Also I Bonds have a 10K limit while TIPs is 5 million per individual. For I Bonds there are legal ways to get above the 10K limit. For example you can get bonds for each family member and gifting is possible but be sure to not accept a gift until after the start of next year.

  15. Rob Dupree

    Joe. I didn't understand your explanation. I own TIPS for years. And they have performed positive. But not great. I thought I would be doing very well now with prices up 8%. But my TIPS dropped. Why?

  16. TNLMAO

    The best investment is farmland always has and always will b

  17. Glenn DiResto

    Seems like short term treasuries 6 months to 2 years is not bad.

  18. Class Act

    TIPS are dependent on the Inflation Numbers that the Fed can make up.

  19. K G

    I thought this was gonna be a more in depth analysis SMH.

  20. Gene Au

    US Forever Stamps. Trust me. Better than gold. ledger backed by real performance and by the US government

  21. A9

    I thought this was going to be about consumers cheaping out on servers.

  22. hi

    She gotta work for dem tips

  23. That Guy

    Question. Most economists on you tube are predicting doom and gloom however over the last month the Dow Jones is up around 10%. I understand it’s still down 10% year to date. Are we seeing a dead cat bounce? Something related to mid terms? Cash fleeing other markets (ie China)?

  24. Big Lou

    it's all a fuckin scam, I pray that this whole ponzi scam comes crashing down very soon. I'm not wasting money on any of this bullshit.

  25. RickyBobby

    Too late for 9.62% I-Bonds. Buying now, your rate will start at 6.48%.

  26. Szymon S

    Love your English and articulation 🙂

  27. B H

    Joe, can you do a video on your thoughts of market bottoming and/or Fed pausing (not halting). Thanks.

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