Investors can still get solid yields with Treasury inflation-protected securities, but they should be careful if they want to use it as a short-term hedge against inflation. The government bonds, known as TIPS, have real yields that already account for inflation . Their principal rises and falls alongside the movement in the consumer price index, which measures the cost of goods and services. Right now, 5-year TIPS yield about 1.6%, while the 10-year yields roughly 2% and the 30-year has a yield of around 2.3%. Consumer prices rose higher than expected in January, putting the annual inflation rate at 3%. At the same time, there is concern about the impact of President Donald Trump ‘s tariffs on inflation. The latest University of Michigan survey shows consumer sentiment plunged in February, largely due to fears that prices will increase due to tariffs. In the Federal Reserve minutes from January’s meeting, which were released Wednesday, officials noted “upside risks to the inflation outlook. In particular, participants cited the possible effects of potential changes in trade and immigration policy.” US5YTIPS 1Y mountain 5-year TIPS Inflation protection vs. short-term hedge When buying TIPS, it matters whether you plan to hold them to maturity or will look to sell them on the secondary market, said Collin Martin, fixed income strategist at Schwab Center for Financial Research. Initial issue TIPS can be bought directly from the federal government through Treasury Direct . There are also TIPS exchange-traded funds that may offer a range of maturities and duration, but their value can fluctuate. “TIPS are very very attractive right now and a great way to protect against inflation but they are not short-term hedges,” he said. “They are still bonds. Their prices can still fall to offset the inflation adjustment.” For instance, in 2022 and 2023, rates rapidly rose as inflation grew, Martin said. “That pulled the prices of TIPS down. The prices fell so much they actually offset the inflation adjustment,” he explained. The benefits of TIPS are typically felt when actual inflation exceeds the markets’ expectations, Wells Fargo Investment Institute said in a note Tuesday. “Tariffs can create transitory price increases, but, longer-term market expectations for future inflation remain moderate,” said Luis Alvarado, global fixed income strategist at the firm. US10YTIP 1Y mountain 10-year TIPS Breakeven inflation rates, which is the difference between nominal Treasury yields and TIPS yields, for the five-year and 10-year have not risen significantly, he noted. That indicates investors aren’t pricing in sustained higher inflation, said Alvarado, who has a neutral guidance on TIPS. “They can play a role in providing diversification to a fixed-income portfolio,” he wrote. “However, we would be cautious of potential return surprises, as TIPS indices are relatively long duration which increases sensitivity to interest rate movements.” Martin said TIPS can make sense if investors want them for long-term protection against inflation. “If you lock in an individual TIPS with a positive yield and hold to maturity, you are guaranteed to outperform inflation by that amount,” Martin said. In other words, if you buy a 10-year TIPS with a 2% yield, regardless of what inflation does over those 10 years, you will beat inflation by 2% annually, he said. For those worried about inflation remaining high, they can look at those breakeven rates to determine if TIPS will help them instead of buying traditional Treasurys, he noted. For instance, if the 10-year Treasury were to yield about 4.5% and the 10-year TIPS yield were near 2%, the breakeven rate would be 2.5%, Martin said. “That means that over the next 10 years inflation would need to average more than 2.5% for the TIPS to make more sense than the traditional Treasury,” he said.
