Yields are surging on these inflation-protected bonds. How they may fit into your portfolio
Inflation-protected bonds saw a jump in yields last week, presenting an attractive buying opportunity for price-conscious investors. The 10-year Treasury inflation-protected securities bond topped 2.42% last week, touching its highest level since October 2023, according to Tradeweb. The 30-year TIPS surpassed 2.97%, its highest yield since late November 2008. US30YTIP 1M mountain U.S. 30-year TIPS in the past month The runup in yields came as the U.S. launched a series of attacks against Iran, driving up oil prices and reigniting investors’ inflation fears. International Brent crude oil futures rose more than 14% on the week, their straight week of gains. “TIPS yields of all maturities are up, but the long-term ones are very high and making lots of headlines,” said Collin Martin, head of fixed income research and strategy for theSchwabCenter for Financial Research. While Martin sees some value for a small portion of an investor’s portfolio, long-dated issues like the 30-year TIPS also bring plenty of interest rate risk. Inflation focus TIPS offer investors interest income twice a year, and their principal fluctuates over their term based on the Consumer Price Index for All Urban Consumers . When the bond matures, holders get either inflation-adjusted price or the original principal. What makes them compelling lately is the nominal return – that is, the real yield on a TIPS plus the anticipated rate of inflation. “Let’s say that the 30-year TIPS is near 3%,” said Martin. “If you think inflation will stay elevated and that it’s going to be 3%. You’re looking at a 6% annualized nominal yield. That’s not far below nominal equity returns.” There is a trade-off here for investors, though. Even as TIPS are relatively safe, they’re still bonds – and the issues with the longest maturities will see their prices swing as interest rates fluctuate. “There’s the lock-in value that is relatively attractive from a yield perspective, and there is the belief that inflation protection may be mispriced,” said Matt Wrzesniewsky, head of fixed income client portfolio management at Vanguard. “There’s volatility there and just a lot of interest rate risk as well.” Adding TIPS exposure and determining which maturity is right for your circumstances will require you to talk with your financial advisor. Even then, TIPS are best used as a small piece of an investor’s diversified fixed income portfolio. “It’s like going to the buffet,” said Wrzesniewsky. “Are you going to load up on broccoli? No, there are other things out there you can use to build a well-balanced meal.” Credit spreads have been stable between 70 and 90 basis points for investment grade bonds and even though the 10-year Treasury yield has been in a range of 4.25% to 4.75%, “for the most part things are well contained,” Wrzesniewsky said. “You have so much income and that creates more resilience and tolerance for this type of noise,” he added. TIPS bonds versus funds TIPS are available directly through the U.S. government on its TreasuryDirect website, where you can purchase maturities of 5-, 10- or 30 years in increments as small as $100. You can work with your financial advisor to pull together a portfolio of TIPS with different maturities and reinvest the proceeds into a new TIP as each issue comes due in a process known as laddering. TIPS ETFs are also available for retail investors, and they come in varying maturities.The Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) has a 30-day SEC yield of 2.02% and an average duration of 2.3 years. Just be aware that ETFs will see price fluctuations as they don’t have a true maturity date.
