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TIPS: Still A Bargain?

Written by Paul Amery

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Heading into the second half of 2009, Treasury Inflation-Protected Securities have been a success story few probably imagined a year ago.

Inflation is still a source of debate. Indeed, many investors say they're still more concerned about deflation. So from a near-term view, what is driving a dramatic reversal in fortunes in TIPS funds this year?

Consider the most popular exchange-traded fund in the group. That's the iShares Barclays TIPS bond fund (NYSEArca: TIP). It has nearly doubled in size from a year ago, and now counts more than $15.3 billion in assets. Through the initial seven months of this year, investors had put $5.6 billion of net inflows into the fund—more than twice as much as the same time last year.

By comparison, the second-biggest bond ETF is the iShares iBoxx Investment Grade Corporate Bond Fund (NYSEArca: LQD). In that same period, it had attracted about $5.1 billion in net flows (vs. $765 million over the opening seven months of 2008). It was listed by the National Stock Exchange last month as the second-biggest bond ETF; it now has nearly $13 billion in assets.

To put things into perspective, the broad iShares Barclays Aggregate Bond Index Fund (NYSEArca: AGG) is third with some $10.2 billion. But that’s about the same level it was at this time last year.

Of course, corporate bonds have been on fire. LQD, for example, has returned more than 9% for its investors in the past 12-months. Compare that to TIP, which has negative total returns greater than 1% over that same period.

But TIP has mounted a comeback this year, up nearly 5% so far in 2009. The other ETF focused on U.S. TIPS, the SPDR Barclays TIPS (NYSEArca: IPE), has rebounded even more strongly. In the past 12 months, it still is down by more than 1%; since Jan. 1, however, IPE has returned more than 6%.

LQD remains hot, up better than 6%. (The broad-market AGG has gained less than 2% this year.)

At the same time, conventional government long-bond ETFs have suffered in 2009, with the iShares Barclays 20+ Year Treasury bond fund (NYSEArca: TLT) down by more than 17%.

Below is a table showing the changes in conventional (fixed-rate) U.S. Treasury yields year-to-date.


Conventional U.S. Government Bond Yields 12/29/08 (%) 8/26/09 (%) Change (bp)
2 year 0.74 1.06 32
5 year 1.46 2.45 99
10 year 2.08 3.45 137
30 year 2.58 4.21 163

Source: Financial Times data


Yields have risen at all maturities, but disproportionately for longer-dated bonds, causing the heaviest losses for investors in the long end of the yield curve, since the price sensitivity to interest rate changes is greatest there.


More on this topic

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The Bond Market is Not Stupid

Cliff Asness Weekend

Bond Investing,
at Wikinvest


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