This week’s 5-Year TIPS auction may result in the highest real yield in over a decade – to buy or not to buy? Let’s talk about:
1. Which numbers you should consider beforehand
2. Where to find these TIPS if you want to buy
3. Why we bought just $1,000 of TIPS instead of $10,000 &
4. What you should ask yourself before making your decision

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HOW TO: Hedge Against Inflation

REVEALED: Best Investment During Inflation

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This week’s Treasury auction of Treasury Inflation-Protected Securities (TIPS) saw the highest real yield in over a decade. This development has caught the attention of investors and economists alike, as it reflects a changing inflationary environment and potentially higher returns for fixed-income investments.

TIPS are a type of government bond issued by the U.S. Department of the Treasury. Unlike conventional bonds, TIPS are designed to protect investors against inflation. Their principal value adjusts with changes in the Consumer Price Index (CPI), ensuring that investors receive a set real return above inflation. This unique feature makes TIPS an attractive investment avenue for those seeking protection against rising prices.

In recent years, inflationary concerns have been relatively subdued, leading to lower real yields on TIPS. However, the auction held this week bucked this trend, with investors demanding higher real yields in exchange for buying TIPS. The auction resulted in a real yield of -0.867% for the 10-year TIPS, the highest since April 2011. This means that investors are willing to accept a negative real return in order to protect their investments against inflation.

So, what factors have led to this surge in real yields at this TIPS auction? One primary reason is the growing concern over inflationary pressures in the economy. In recent months, there have been signs of rising inflation, fueled by a combination of increased government spending, supply chain disruptions, and pent-up consumer demand. These factors have led to higher input costs for businesses, who may ultimately pass on these increased expenses to consumers in the form of higher prices.

The higher real yields on TIPS can be seen as a response to the potential threat of inflation eroding the purchasing power of fixed-income investments. Investors are demanding higher returns to compensate for the risk of inflation eating away at the value of their bonds. This higher demand for TIPS, in turn, drives up their price and lowers their yield.

The impact of higher real yields at this TIPS auction extends beyond the domestic market. It signals a potential shift in global fixed-income markets, where investors have been grappling with low yields for an extended period. The higher real yields on TIPS may attract international investors seeking relatively safer investments in a potentially inflationary environment.

For the Federal Reserve, this development poses some interesting challenges. The central bank has stated that it views the current rise in inflation as transitory and is committed to maintaining accommodative monetary policy. However, if market expectations of inflation continue to rise, it may put pressure on the Fed to address these concerns more directly.

In conclusion, the highest real yield at this week’s TIPS auction in over a decade reflects growing inflationary pressures and the need for investors to protect their purchasing power. It highlights the changing dynamics in fixed-income markets and the potential for higher returns on TIPS. As we navigate the uncertainties of a post-pandemic world, investors and economists will closely monitor inflationary trends and the role TIPS play in safeguarding investments against rising prices.