BlackRock Makes a Case for TIPS

It may be time to add exposure to Treasury inflation-protected securities (TIPS), according to BlackRock’s global chief investment strategist.

In his weekly market commentary for BlackRock, Richard Turnill writes that a slowing but growing U.S. economy, coupled with a Federal Reserve on hold, should boost the appeal of inflation-linked U.S. bonds.

“We expect the Fed to hold off on any rate moves until at least the second half of 2019, after it pledged a more patient stance on policy,” Turnill writes. “Combined with still solid economic growth, this is likely to further weigh on both nominal and real yields.”

According to Turnill, this makes TIPS an attractive alternative to nominal bonds.

In addition, the Fed may let inflation temporarily breach its 2% target.

Turnill notes that Fed officials have also signaled they may be willing to allow for “modest overshoots” above the central bank’s inflation target to make up for past undershoots.

Bloomberg reported on Feb. 22 that two Federal Reserve officials — San Francisco Fed President Mary Daly and New York Fed President John Williams — recently highlighted the benefits of an approach to monetary policy called “average inflation targeting.” This approach, both Bloomberg and Turnill note, would involve accepting overshoots of the central bank’s 2% goal to make up for times when inflation was too low.

The two Fed presidents both mentioned the tactic during presentations at a conference in New York, according to Bloomberg.

At the time, Williams said that the “persistent undershoot of the Fed’s target risks undermining the 2% inflation anchor.” Daly noted that “inflation has been below our target” for a long time, according to Bloomberg.

According to Bloomberg, it’s expected that average inflation targeting would be among the options reviewed by the Fed this year.