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Monday, January 24, 2022

Inflation protection, with some leaks

“Interest payments are subject to change,” said Gargi Chaudhury, head of investment strategy at iShares Americas for BlackRock, as these payments are based on principal, which can change with inflation.

The CPI has recently outperformed expectations. But this situation did not always prevail.

“Looking back a decade ago, inflation expectations were higher than inflation rolled in year after year,” said Steve A. Rhodosky, co-manager of PIMCO’s Real Return Fund. “So people would be better off owning registered Treasury bonds.” (“Nominal” is the professional term for bonds that are not protected from inflation.)

Perhaps the most confusing quality of TIPS is the nature of their protection against inflation.

It might seem that the TIPS fund will work like hiking pants that zip up into shorts: suitable for any (inflationary) conditions. But what sets TIPS apart is the protection they provide against unexpected inflation, said Roger Aliaga-Diaz, chief economist at Vanguard.

Market prices for all assets are adjusted to some extent to reflect expected inflation. Standard bond prices, for example, are falling to make up for the fact that inflation has stolen some of their original yield. TIPS prices are also falling, although the big difference is that their inflation adjustment helps offset this. (Prices and bond yields move in opposite directions.)

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Whether you choose a TIPS fund in your portfolio will likely depend on your age and inflation expectations.

Retirees and people approaching retirement might choose one because its value should be less volatile than other assets that can help mitigate inflation, such as stocks and commodities, Mr Aliaga-Díaz said. Vanguard’s Target Retirement 2015 Fund, a so-called due date fund, is committing 16 percent of the value of its assets to TIPS.

Jennifer Ellison, a financial advisor in Redwood City, Calif., said her firm Cerity Partners currently recommends that clients hold 15 to 20 percent of their bond portfolio in TIPS funds. “But at times we only had 10 percent,” she said.

World Nation News Deskhttps://www.worldnationnews.com
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