Treasury Inflation-Protected Securities (TIPS) are a type of bond issued by the U.S. government. They are designed to protect investors from the negative effects of inflation.
How TIPS Work
The principal of a TIPS bond is adjusted based on changes in the Consumer Price Index (CPI). If the CPI rises, the principal increases, and if the CPI falls, the principal decreases. The interest rate on a TIPS bond is fixed, but the interest payments will vary depending on the adjusted principal.
Factors Affecting TIPS Performance
Several factors can influence the performance of TIPS, including:
- Inflation expectations: If investors expect inflation to rise, the demand for TIPS will increase, driving up their prices and lowering their yields.
- Real interest rates: Real interest rates are nominal interest rates minus inflation. If real interest rates rise, the demand for TIPS will decrease, driving down their prices and increasing their yields.
- Market sentiment: Overall market sentiment can also affect the performance of TIPS. For example, during times of economic uncertainty, investors may flock to safe-haven assets like TIPS, driving up their prices.
Recent Performance
The performance of TIPS in 2015 reflected broader market trends and inflation expectations. As inflation remained low, TIPS returns were modest. However, they still provided a valuable hedge against unexpected increases in inflation.
