What are TIPS? Investing Explained


INVESTING EXPLAINED: What you need to know about TIPS – acronym for Treasury inflation-protected securities, a bond issued by the US Treasury

In this series, we bust the jargon and explain a popular investing term or theme. Here it’s TIPS.

Tips 

I suspect that this has nothing to do with the charge for service in a restaurant… 

Correct. The acronym ‘Tips’ stands for Treasury inflation-protected securities, a bond issued by the US Treasury, a government department. The value of these bonds rises in line with inflation, helping people protect the spending power of their money.

Tipping point: The value of the bonds rises in line with inflation, helping people protect the spending power of their money

Why are people talking about tips now? 

Investors want a shield against inflation, which is known as ‘the silent thief’ since it stealthily eats away at the value of money. According to some observers, inflationary pressures are slackening in the US. 

But, even if this is the case, inflation may hang around for a while. 

Duncan MacInnes and Fiona Ker, managers of Ruffer, a defensive trust, highlight data on inflation in advanced economies between 1980 and 2020. These figures show that, once inflation reaches 5 per cent, it takes as a long as a decade to decline to 2 per cent. 

How does inflation-proofing on tips work? 

Tips pay a fixed-rate of interest twice a year. Since the amount paid out in interest is based on the value of the bonds, it will rise and fall in line with inflation. 

When Tips reach their maturity date, investors receive back either the original capital amount, or a sum linked to inflation, whichever is greater.

Are Tips a low-risk investment? 

Yes. These bonds are backed by the US government, which can be relied upon to pay its bills. 

As a result, Tips are regarded as a store of value, but they are also seen as a source of liquidity since they can be easily cashed in.

What’s the downside? 

Critics point out that the pricing of Tips, which are traded on the bond markets, reflects the consensus of expectations about inflation. Tips tend only to outperform other US government bonds if inflation surges faster than forecast. 

What’s the upside? 

At present, many Tips are trading at a discount. As a result, the yields on these bonds are at a 10-year high (the yield of a bond goes up when the price goes down). 

Observers say that the fall in prices represents an opportunity since the inflation-proofing is based not on the price you pay for a Tip, but on its ‘par’, or face value.

How long have Tips been around? 

The Bank of England began to offer index-linked gilts – ‘linkers’ – in 1981 to cater for the requirements of pension funds. At that time, the UK rate of inflation was 11.87 per cent. 

The US Treasury did not launch Tips until 1997, when the rate of inflation was a mere 1.7 per cent. Today’s inflation rates are 11.1 per cent and 7.7 per cent respectively. The market in Tips, which come in maturities of five, 10 and 30 years, is now worth about $1.9billion (£1.6billion). 

Which UK managers are putting money into Tips now? 

The managers of defensive trusts which aim to safeguard capital are big fans. Tips and UK index-linked gilts represent as much as 51 per cent of the portfolio at Ruffer. 

At the Personal Assets trust, Tips make up 37.2 per cent of total holdings. Capital Gearing, another defensive trust, also has stakes. 

Read more at DailyMail.co.uk