What Should You Do With Your TIPS?
With yields up and inflation tame, is this asset class still a must-own?
Treasury Inflation-Protected Securities, or TIPS, have been called the only asset class that's truly risk-free. The securities are backed by the full faith and credit of the U.S. government, so there's no credit risk. In addition, TIPS' principal values adjust to keep pace with inflation, which helps protect owners' purchasing power. That's a benefit holders of nominal Treasury bonds do not have. Assuming real yields are positive--and that hasn't always been the case--someone buying and holding a TIPS bond to maturity is guaranteed a positive real return.
TIPS have also proved to be great diversifiers for stocks during their relatively short lifespan. (The first TIPS bonds were issued in 1997.) Although they didn't hold up nearly as well as nominal Treasuries during the financial crisis of 2007-09, their correlations with small- and mid-cap U.S. stocks, in particular, are among the lowest of any major asset-class pair.
Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.