The Trouble With TIPS (and Some Workarounds)
Interest-rate sensitivity is an issue for TIPS, but there are ways to mitigate it.
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After languishing at below-normal levels for the better part of a decade, worries over inflation have flared over the past week following the election results. As Morningstar director of economic analysis Bob Johnson noted in this video, an increase in infrastructure spending, accompanied by tax cuts and decreased regulation, all of which President-elect Donald Trump put forth as economic prescriptions in the run-up to the election, could stoke inflationary pressures. As a result, the so-called breakeven rate--the yield differential between nominal (non-inflation-adjusted) Treasuries and Treasury Inflation-Protected Securities--jumped in the days following the election. The break-even rate stood at 1.71% the day before the election; by Nov. 14, it was up to 1.83%. That's an indication that investors think inflation will be moving up.
Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.