Economy

What are TIPS? Investing explained

INVESTING EXPLAINED: What you need to know about TIPS – acronym for Treasury Inflation-Protected Securities, a bond issued by the US Treasury

In this series, we break down the jargon and explain a popular investment term or theme. Here are the TIPS.

Hints

I suspect this has nothing to do with the cost of service in a restaurant…

Right. The abbreviation ‘Tips’ stands for Treasury Inflation Protected Securities, a bond issued by the US Treasury, a government department. The value of these bonds rises in line with inflation, helping people protect the purchasing power of their money.

Tipping point: the value of bonds rises in line with inflation, helping people protect the purchasing power of their money

Why are people talking about tips now?

Investors want a shield against inflation, known as “the silent thief” because it stealthily eats away the value of money. Inflationary pressures in the US are easing, according to some observers.

But even if this is the case, inflation may linger for a while.

Duncan MacInnes and Fiona Ker, trustees of Ruffer, a defensive trust, highlight data on inflation in advanced economies between 1980 and 2020. These numbers show that once inflation hits 5 percent, it will take a decade to drop to 2 percent. per cent.

How does inflation proofing tips work?

Tips pay a fixed rate twice a year. Since the amount paid in interest is based on the value of the bonds, it will rise and fall in line with inflation.

When tips reach their due date, investors will receive either the original amount of capital back or an amount linked to inflation, whichever is greater.

Are tips a low-risk investment?

Yes. These bonds are backed by the US government, which can be relied upon to pay its bills.

As a result, tips are considered a store of value, but they are also seen as a source of liquidity, as they can be easily cashed in.

What’s the downside?

Critics point out that tip pricing, which is traded in bond markets, reflects consensus expectations about inflation. Tips will only outperform other US Treasury bonds if inflation rises faster than predicted.

What’s the benefit?

At the moment, many tips are traded at a discount. As a result, yields on these bonds are at their highest level in 10 years (a bond’s yield rises when its price falls).

Observers say the drop in prices represents an opportunity, as inflationary resilience is not based on the price you pay for a tip, but on the “par,” or face value.

How long has Tips been around?

The Bank of England began offering indexed gilts – ‘linkers’ – in 1981 to meet the needs of pension funds. At that time, inflation in the UK was 11.87 percent.

The U.S. Treasury Department didn’t launch Tipping until 1997, when the inflation rate was just 1.7 percent. Today’s inflation rates are 11.1 percent and 7.7 percent respectively. The tipping market, with maturities of five, 10 and 30 years, is now worth around $1.9 billion (£1.6 billion).

Which UK managers are now putting money into Tips?

The managers of defensive trusts aimed at safeguarding capital are big fans. Tips and UK-indexed gilts make up a whopping 51 percent of the portfolio at Ruffer.

At the Personal Assets trust, tips make up 37.2 percent of total assets. Capital Gearing, another defensive trust, also has interests.

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Jacky

The author of what'snew2day.com is dedicated to keeping you up-to-date on the latest news and information.

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