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August 27, 2009 at 08:00 PM
News and analysis from Standard & Poor’s MarketScope Advisor
Like income taxes, junk mail, health care reform, and Barry Manilow, some things just don’t go away. For investors, inflation is the guest that won’t leave, reappearing unexpectedly from some hidden recess at the most inconvenient moment.
As it turns out, Wall Street has just the thing for those made nervous by the inflationary implications of the government stimulating the economy with $787 billion in new spending while bailing out Fannie Mae, Freddie Mac, AIG, and two of the three U.S. automakers from bankruptcy. Inflation-protected bond funds, also called inflation-indexed funds or “real return” funds, offer investors a defense against accelerating inflation by investing in Treasury Inflation Protected Securities (TIPS), a type of bond issued by the U.S. Treasury since 1997 in which the principal amount changes in line with the Consumer Price Index.
TIPS have attracted increased attention recently, with the Treasury Department announcing in August that investors “can expect issuance to gradually increase” during the 2010 financial year that begins in October. The U.S. Treasury also said it is considering replacing the 20-year TIPS bond with a 30-year bond. (The Treasury stopped issuing 30-year bonds, including 30-year TIPS, in 2001.)
Roughly 25 distinct funds are now being marketed under this category to individual investors, offering a wide variety of investment styles, performance, and costs. The group is generally benchmarked against the Barclays U.S. Government Inflation-Linked Bond Index, which tracks the performance of TIPS with maturities of a year or more. As of early August, the index gained more than 4% year to date. That compares with a decline of 5.15% for Barclay’s U.S. Treasury bond market index.
