​Forget TIPs: No Need for Inflation-Protected Bonds

MoneyShow |


Here’s the non-technical reason why we downgraded Fidelity's Inflation-Protected Bond (FINPX) and its related Index funds to “OK to Sell” — with CPI mostly running under 2% for years, and with no sign that inflation is poised to accelerate, “paying” for inflation protection does not make sense, asserts John Bonnanzio, editor of Fidelity Monitor & Insight.

Of course, today’s low-rate, low inflation environment may not last forever. But for now, many factors are exerting downward pressure on inflation, thereby keeping low-yielding bonds relatively attractive.

These conditions include tepid economic growth, cheap domestic energy, a large contingent labor force, low capacity utilization, and technology-driven efficiencies that reach from the factory floor through distribution channels to the end user. (Think Amazon.)

So, with the notable exceptions of health care and college (where the government is working on your behalf to help rein-in costs!) everything from the price of a dozen eggs to your smartphone plan is more affordable.

None of the above has been lost on investors, including bond-buyers, gold/silver bugs, and those seeking 30-year mortgages. With yields, prices and interest rates all in retreat, the market is signaling that it sees low inflation and slow economic growth ahead.



As for the Treasury Inflation-Protected Securities (TIPS) that are the backbone of Fidelity’s aforementioned fund, they operate a bit differently than regular bonds: Twice a year, the Treasury adjusts a TIPS’ principal (par value) to reflect inflation or deflation.

So, whenever investors have diminished expectations for inflation, their value declines.

Despite their management fees, you’re probably better off holding TIPS in a fund rather than individually. That’s because the semi-annual coupon adjustment from TIPS can create federally taxable “phantom” income.

A good way to evaluate TIPS versus conventional Treasuries is the breakeven inflation rate. If inflation runs higher than that, TIPS are the better deal and vice versa.

That rate is simply the difference between a TIPS yield and the yield on the same maturity Treasury. Right now, the breakeven rate for 10-Year TIPS is 1.83%, versus an actual inflation rate of just 1.6% over the past year.

While you can buy TIPS directly (they come in 5-, 10-, and 30-year denominations) or through funds, we don’t see any compelling reasons to own them right now. We prefer that income-oriented investors use a diversified mix of corporate and government bonds (of varying maturities).

John Bonnanzio is editor of Fidelity Monitor & Insight.

Subscribe to John Bonnanzio’s Fidelity Monitor & Insight here…

About MoneyShow.com: Founded in 1981, MoneyShow is a privately held financial media company headquartered in Sarasota, Florida. As a global network of investing and trading education, MoneyShow presents an extensive agenda of live and online events that attract over 75,000 investors, traders and financial advisors around the world.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Comments

Emerging Growth

Taranis Resources Inc.

Taranis Resources Inc is an exploration stage company. The Company along with its subsidiaries is engaged in the acquisition and exploration of mineral properties. Its projects include Thor Property in…

Private Markets

The Green Organic Dutchman

The Green Organic Dutchman Ltd. ("TGOD") produces farm grown, organic cannabis for medical use. The company grows its high quality organic cannabis in small batches using craft growing, all natural…

Voleo

Voleo is a free download that allows you to form investment clubs with your friends, family, colleagues, classmates, teammates…basically anyone you know and trust. Invest and manage a stock portfolio…