| Treasury Inflation Protected Securities To Hedge Against Inflation |
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| Written by Greg Matthews |
| Saturday, 29 May 2010 13:45 |
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The government has created record in spending which include $108 trillion in unfunded liabilities for social security, Medicare and another universal healthcare benefits. This has put the nation at jeopardy. With the interest rates close to zero, the Federal Reserve are not able to take one conventional step - reducing short-term rates - to reinstate the weakened economy.
The government has created record in spending which include $108 trillion in unfunded liabilities for social security, Medicare and another universal healthcare benefits. This has put the nation at jeopardy. With the interest rates close to zero, the Federal Reserve are not able to take one conventional step - reducing short-term rates - to reinstate the weakened economy. In this hard economic slump or double-dip recession, politicians - with the reluctant assistance of the Fed - might decide to spend even more massively to attempt to jump-start the financial system. The end result can be stagflation: slow growth along with higher inflation. Inflation is the curse to the debt holders. But it is a blessing to the debtors - and Uncle Sam is the chief of them - as they can pay the fixed obligations with increasingly worthless currency. Are you scared of growing inflation? And like to make sure better returns over inflation from your investments at minimum risk? In that case Treasury Inflation Protected Securities (TIPS) can be the most excellent investment option for everyone. Treasury Inflation Protected Securities (TIPS) are also known as Treasury Inflation Index Securities and Real Return Bonds (RRB). TIPS are 'safest of the safe'. There is least downside risk on investment. TIPS are long-term fixed income investments protected against fluctuations in the rate of inflation. But why use TIPS as your hedge against inflation, rather than a traditional hedge, such as precious metals? You can benefit from both as your hedge against inflation. But always remember, precious metals like gold and silver are less than complete hedges. Gold and silver have performed extremely well over the last ten years. Gold has more than quadrupled. Silver has ended still better. But twenty years before that were a total disasters. But no matter even if inflation is low or high, TIPS will protect you from the risk on top of your investment. How? Here are the benefits of buying Inflation-Protected Treasuries: Regular Interest Payments: Just like a regular Treasury bond, TIPS reimburse interest regularly once in six months. However unlike traditional bonds, your principal grows every year by the amount of inflation, as calculated by the consumer price index (CPI). That is when inflation rate is up; value of TIPS is also increased automatically. In other words, inflation protection is available on both capital and investment. The interest paid once in every six months as well escalate by the amount of inflation. Tax Advantages: The interest you receive from TIPS investments are exempted from state and local income taxes (but not federal). TIPS are also less volatile when compared to the traditional bonds. The yield on these TIPS funds is currently about 2.5% (as well as whatever inflation is going forward). One more influential reason to consider adding TIPS to your portfolio is the great portfolio diversification benefits they bring. This reduces the total risk and / or instability of your portfolio over time. TIPS bond yields are little or negative correlation with the performance of many other traditional investments such as stocks and regular bonds. Increasing inflation probability are beneficial for TIPS yield, however in the short term are negative for the returns of stocks and bonds and vice versa. TIPS can be purchased in three ways: 1. Directly: One can buy TIPS directly from the U.S. Treasury or through a bank, broker, or dealer. You can understand more about buying TIPS directly at http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_buy.htm 2. Through the Vanguard Inflation-Protected Securities Fund (VIPSX). 3. Through its ETF equivalent - the iShares Barclays TIPS Bond Fund (NYSE: TIP) Purchasing TIPS through mutual funds offer more flexibility. There are several advantages of buying TIPS 1. TIPS are very safe for long-term investments. 2. TIPS are superb ways to diversity your portfolio that reduces whole portfolio risk. 3. TIPS are government guaranteed. 4. TIPS are less unstable than traditional bonds. 5. TIPS are advantageous when inflation rates are expected to move up plus when financial system slows down. 6. Investment on TIPS involves less active investment management thus help both beginners and skilled traders. Some investors object that TIPS hasn't done anything interesting in recent times. This is not true. We've been in the control of disinflationary forces, not inflationary ones. That will not alter next week or next month. But as the deficit keeps growing that makes people sad, pressure will increase on the government to do "something". That "something" could be a decision to inflate our way out of this mess, rather than risk the type of deflationary spiral that Japan has suffered over the past 2 decades. Keep in mind that: The Fed has by now taken interest rates almost to zero. Congress has by now tried a huge fiscal stimulus. The Federal Reserve has already created trillions out of thin air to mop up worthless securities. There are chances of increase in inflation if the economy stumbles once more that forces to the government to take further action, it could be even further reckless. Some libertarians and laissez-faire capitalists will refuse to buy TIPS. But other inflation hedges sometimes never work. Hence there is no little risk taking another approach. In total, TIPS is the only investment that guarantees a gain that exceeds inflation in the years in the future. And it is in fact an key element of your portfolio. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Hedging against inflation can be risky sometimes. 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