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A Look at the Outlook for TIPS

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Indices Based on TIPS

The S&P U.S. TIPS Index is a broad, comprehensive, market value-weighted index that seeks to measure the performance of the U.S. Treasury inflation-linked market. It tracks the entire TIPS market with maturities ranging from 2015 to 2044. Below is the one-year real yield measure or the yield-to-worst (or YTW) equivalent in the index. As seen below, the real yield has gone negative at times in the past year.

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The outlook for TIPS Market Realist’s View

The graph above shows the yield-to-worst (or YTW) on the S&P 0–1 Year U.S. TIPS Index. YTW is the lowest potential yield that can be received on a particular bond. YTW is arrived at by making worst-case scenario assumptions by calculating the returns that could be received if provisions such as prepayment or call options are used by the issuer.

YTW on the S&P 0–1 Year U.S. TIPS Index is currently in negative levels, as the graph shows. However, TIPS (VTIP) (TIP) are likely to underperform since inflation levels and growth rates are very low on a global level. This has caused some global sovereign bonds to trade at negative yields.

However, in the coming months, inflation in the United States may rise due to the base effect where current oil (USO) prices may be higher than they were 12 months ago. However, in the medium term, the outlook for TIPS isn’t quite assuring. It’s probably wise, though, to invest a small portion of your portfolio in TIPS since they provide diversified benefits and act as a hedge in case inflation rates rise unexpectedly.

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