Another Look at My Investing Tip

I recently stumbled upon an investment idea, Treasury Inflation-Protected Securities (TIPS), and have loaded up on them. I first shared the idea here in early October, discussing a tip to beat inflation. After the election, I followed up, explaining why TIPS are primed to do better. Today, I discuss how TIPS have performed, how my exposure has changed, and why they make so much sense.

Before I go on, I want to explain again and hopefully better how TIPS work. Each security is auctioned by the federal government with an interest rate that is typically lower than the rates on similar-maturity U.S. Treasury securities that are not TIPS. Every six months, the principal, which is paid at maturity, is adjusted for inflation. For example, a new 10-year TIPS would have an interest rate of roughly 1.9%. This is less than the 4.15% yield on the 10-year note, but it pays the principal indexed for inflation. If inflation were 3% for the next 10 years, the security would pay $1347 in 2034 roughly for a $1000 investment. The total payments would be $1537, consisting of $190 in interest and the principal of $1347. This is 53.7% of the investment. A regular Treasury would pay more interest ($415) but just $1000 in principal, which would be total payments of $1415. The holder of the TIPS would have slightly more money. If inflation were 10%, the return would be much higher, but it would be less if inflation were zero.

TIPS Are Performing Well in the Short-Term

In the last article, I shared a table on the Treasury yields, and I am updating it here:

Interest rates have declined a bit over the last month, but they are still up a lot from October 1st. The FOMC began lowering rates on September 18th.

The current yield on TIPS runs from 1.71% for 5 years to 2.14% for 30 years. According to my data from Bloomberg, the 30-year has increased by 11 bps over the past year, though it is a single basis point lower over the past month. While Treasury yields are lower over the last month by more, suggesting higher prices for investments made, TIPS rates are still lower. The "real yield" is the rate of interest with inflation subtracted, which is what the TIPS is, and the current difference between TIPS and regular Treasuries is a little over two percent. This suggests that investors are expecting inflation to be close to 2%, which is pretty low but is the goal of the Federal Reserve. The 5-year TIPS is 1.90%, the 10-year TIPS is 2.08%, and the 30-year TIPS is 2.14%.

In both of my previous pieces, I discussed how gold has been soaring, presumably as investors try to protect against inflation. SPDR Gold Trust (GLD) is a massive ETF and perhaps the best way to measure what gold is doing, and it is up 27.1% so far in 2024. Since the last piece, it has dropped 2%. It's actually down a bit since the first one too. In that first piece, I discussed Vanguard Short-Term Inflation Protected Securities Index (VTSPX), and it has slightly outpaced GLD in Q4:

This is just one measure of TIPS, and it is a very short period of time, but it helps show that TIPS are performing well currently after a rough beginning to Q4..

I Now Own a Different TIPS ETF

In that last piece, I discussed several ETFs and funds that invest in TIPS, disclosing that I had owned iShares TIPS Bond ETF (TIP) in my IRA and VTSPX in my charitable fund. I brought up a new ETF that I had just discovered, the PIMCO 15+ Year US TIPS ETF (LTPZ). I now own a bit more VTSPX in the charitable fund, and I sold out of TIP over time and bought LTPZ in my IRA. It is currently about 10%. My wife bought some as well. VTSPX is now 34% of the charitable fund account.

I bought LTPZ despite the fact that it is much smaller than TIP. It is big enough, in my view. What I like about it is that for those who think TIPS are cheap, the longest maturities are the best way to capitalize.

Since that last piece, here is how LTPZ has performed relative to TIP:

It was that dip that excited me, and I took advantage of it. There are other ETFs to watch too, but this is the one that I like. Looking at it and some others as well as GLD for the past 10 years, it really stands out:

To me, it looks like it ran up too much during the pandemic but has fallen too much and not yet lifted subsequently.

The Outlook for TIPS Remains Positive

I remain very bullish on TIPS, though I am not sure that there will be a short-term lift. I am cautious on Treasuries in general, as they are too low in my view. It has seemed that when Treasury prices are falling, there can be short-term pressure on TIPS as well. To me, days with rates on Treasuries going up are a good time to add to TIPS.

As I have said, I am not expecting a lot of inflation, but the TIPS should do well if that happens. I think that the current price, which implies inflation will fall further, is attractive, as seems too low. I remains confused about why there is so much interest in gold (and bitcoin!), but so little in TIPS.

Conclusion

I used to be a "bond guy" professionally but never invested in TIPS before. I recently bought some and shared my perspective here. I updated after it went against me initially, but I wanted to reiterate my bullishness.