Executive summary
This report reviews Treasury Inflation Protected Securities (TIPS) and their benefit in asset allocation.
Key findings include:
- Unlike typical Treasury securities, TIPS provide protection against inflation.
- In periods when inflation exceeds expectations TIPS will tend to outperform regular Treasury securities.
- Given the recent inflation dynamic and over a multi-year horizon it has been beneficial to allocate to short dated TIPS compared to short dated Treasuries over the last five years..
What are Treasury Inflation Protected Securities (TIPS)?
While many know about short dated Treasury securities, known as T-Bills or even longer dated Treasuries securities such as Treasury Notes few know about the existence of a different type of Government Treasury securities known as Treasury Inflation Protected Securities.
As their name indicates Treasury Inflation-Protected Securities (TIPS) are designed to protect against inflation. They pay interest every six months, and both the principal and interest payments are adjusted based on changes in inflation as measured by the Consumer Price Index (CPI).
Such as Treasuries, TIPS are issued and guaranteed by the U.S Government and are issued with a wide range of maturities.
Advantages and Disadvantages of TIPS
Given TIPS provide protection against inflation their price and performance is affected by inflation and inflation expectations.
Typically TIPS will outperform regular Treasury when inflation is higher than what is expected by the markets. While on the flipside TIPS will tend to underperform Treasuries when inflation ends up being lower than market expectations. So in periods where inflation exceeds market expectation it is advantageous to allocate to TIPS.
While TIPS are lesser known than regular Treasuries they are also available via ETF which makes it easy to allocate to.
TIPS vs Treasuries Performance
Below we review the performance of two ETFs, one allocated to short dated Treasuries (SHY) and short dated TIPS (STIP) over different periods of time.
As the chart below shows, given inflation has over the last few years tended to exceed expectations it has been beneficial to allocate to TIPS as compared to regular Treasuries; and this over multiple different time horizons.
Most notably short dated TIPS have generated 3 times more returns over the last five years than regular Treasuries.
Data: Bloomberg
Conclusion
As we have seen, TIPS can be an interesting asset to own as well as being incorporated in a cash management strategy, especially in an environment where inflation exceeds expectations. At Treasure we strategically use short dated TIPS as part of the cash management allocations we provide to our customers.
About Treasure: Treasure is a leading financial technology company that provides advanced cash management and embedded investment services via its proprietary API. With the Treasure API, businesses can seamlessly embed a complete suite of managed investment and cash management offerings into their own platforms. Beyond its innovative API, Treasure also provides a sophisticated cash management platform to hundreds of businesses to turn their idle cash into secure revenue. Discover more at treasurefi.com and treasurefi.com/api.
Disclosure: Investing involves risk, including loss of principal. The information provided is for informational purposes only and should not be construed as investment, financial, legal, or tax advice. This material should not be considered an offer or recommendation to buy or sell a security, or a recommendation of any specific investment or strategy. You should consult your own financial, legal, and tax advisors before engaging in any transaction. While information and sources are believed to be accurate, Treasure does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information. For more information about Treasure, please visit treasurefi.com.
