The Calafia Beach Pundit has an interesting discussion on TIPS (inflation-linked bonds). What caught my eye was a nice chart of historical TIPS real (after-inflation) yields vs. Treasury nominal yields. The difference is what inflation would have to be for them to pay out the same total yield, called the “breakeven inflation rate”. If actual inflation is lower, then Treasury bonds end up paying more. If actual inflation is higher, then TIPS pay more. (I’m not really sure why the breakeven inflation rate is on a different scale.)
It’s interesting how relatively steady the breakeven inflation rate has been. The low breakeven inflation rate back in 2009 was a good time to stock up on TIPS. Today, the expected inflation is about the same as historical average but real yields are at historical lows. He concludes:
To sum up: TIPS are only attractive to an investor who believes 1) that inflation will prove to be higher than expected, and 2) that economic growth will continue to be disappointing.
I’m still holding a position in TIPS in my portfolio asset allocation. I have historically overweighted them with high real rates, and today I am slightly underweighting them due to low real rates. They’ve done their job though, helping keep me off the Pepto Bismol during these last few years.