The principal value of inflation-indexed Treasurys is stepped up along with the consumer-price index. You also earn a small amount of additional interest. This "real" yield reflects your gain above inflation -- and right now the rate is pretty attractive.
For instance, if you buy 10-year inflation-indexed Treasurys today, you can lock in a yield above inflation of just under 2.4 percentage points a year. That's some 2.6 percentage points less than the 5% yield on conventional 10-year Treasury notes.
In other words, if annual inflation turns out to be higher than 2.6% over the next 10 years, inflation-indexed Treasurys will outperform conventional Treasury notes. That strikes me as a distinct possibility.
But even without a pickup in inflation, the yield on inflation bonds looks pretty appealing. The average historical, after-inflation return on conventional intermediate and longer-term bonds is roughly 2.3%, notes investment adviser Larry Swedroe, co-author of "The Only Guide to a Winning Bond Strategy You'll Ever Need."
With inflation-indexed Treasurys, "you should be willing to accept a lower return, because you're getting insurance against unexpected inflation," he argues. Indeed, when 10-year TIPS hit 2.15% late last year, Mr. Swedroe started buying individual inflation-indexed Treasury bonds, and he has continued to buy as rates have climbed.
If you prefer mutual funds, check out offerings like Fidelity Inflation-Protected Bond or Vanguard Inflation-Protected Securities. One warning: Like other taxable bonds, inflation-indexed Treasurys can generate big tax bills. To postpone those bills, hold your inflation-indexed bonds or funds inside a tax-sheltered retirement account.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.