TIPS on a Tear, but for How Long?

Who knew investing in Treasury Inflation-Protected Securities could be so exciting?

The yield on a 10-year TIPS bond before any inflation adjustment was 2.17% at the beginning of 2009. As of Dec. 1, it was 1.14%. The last time 10-year TIPS yielded below 1.20% was in early 2008.

The big drop in yield has meant strong returns for TIPS funds this year even though inflation is about flat on an annualized basis over the past 12 months.

The average year-to-date return of the 41 funds in the inflation-protected bond category is 12.51%. That handily beats the 6.9% return for the average intermediate government bond fund over the same period.

The worst-performing fund in the category, Principal Inflation Protection PIPIX, is still up 8.19%. The best-performing funds are up more than 20%.

The largest TIPS fund in terms of assets, Vanguard Inflation-Protected Securities VIPSX, is no exception. The $26 billion fund is up an impressive 13% for the year to date through Dec. 2.

The fund, run by Kenneth Volpert and John Hollyer since its inception, has had an influx of investor assets. It is now Vanguard's ninth-largest fund, up from 2008 when it was the firm's 13th largest. It started this year with roughly $17 billion in assets.

The big run-up and interest in TIPS has some managers wary of the future returns for many TIPS maturities, especially those with less than a five-year maturity. For example, Bloomberg reports that on Dec. 3 the yield on the five-year TIPS is 0.18%, near its all-time low.