By Matthew Kerkhoff
On Wednesday we explored Treasury Inflation-Protected Securities (TIPS) and how they operate. Today we're going to build on that discussion to extrapolate how much inflation market participants are expecting. We'll also discuss whether TIPS are an appropriate investment based on the degree to which your own personal expectations of inflation match those of the broader market.
Recall that TIPS are very similar to Treasuries, except that TIPS have an adjustment mechanism which protects investors from inflation, as measured by the CPI.
Investors who opt to purchase regular Treasuries (not inflation adjusted) instead of TIPS are exposing themselves to the impact of inflation on the underlying bond. Since these investors are taking on more risk (erosion of value from inflation), it makes sense that they would demand a higher premium. This additional premium can be thought of as "protection" for owning regular Treasuries instead of TIPS. Whether it is enough protection depends on ... Log in or subscribe to continue reading.