Today’s (Thursday, 11/21/13 ’s,
page C1) Wall Street Journal featured
a front page article in the Money and Finance section entitled “Inflation
Linked Bonds Take a Hit.” The paper
reports, accurately, that Treasury Inflation Protected Securities (“TIPS”) have
taken something a beating, in bond terms, this year, with a total return of
negative 7%. (While the article doesn’t
specify where this number for “TIPS” came from, I’m assuming that it is
measuring return based on the exchange traded fund (“ETF”) TIP; the ETF’s year
to date return matches that negative 7% number.) This miserable, by bond standards,
performance has been the obvious result of two distinctly anti-TIP developments
in the economy and the financial markets.
First, all bonds, or at least all treasury bonds, have had a bad year as
the economy improves and the Fed hints at tapering (Oh, how I’ve come to hate
this latest term from which one cannot seem to escape! But I digress.) its bond buying program. Second, there is no measurable inflation in
the economy. The CPI
is increasing at a 1% annual. Whether
that number jibes with one’s experience is another issue; the inflation
compensating increments to TIPS are based on the CPI ,
so that is the measure with which we are forced to live in this circumstance.
As regular readers know, I’m a big (for me; by most
standards, I’m not a big holder of anything) holder of TIPS in my own accounts,
and have been for years. I have
counseled friends and consultees to own TIPS for just as long. I continue to both hold TIPS and advise
people to hold TIPS despite some misgivings and hand wringing near the top of the
TIP market; see 6/26/13 ’s
TREASURY INFLATION PROTECTED SECURITIES (“TIPS”): REPLACING PANIC WITH CALM PERSPECTIVE and 2/2/13 ’s
YES, I’M STILL HOLDING ONTO MY TIPS.
Am I displeased, sullen and down in the mouth, about my
large TIP holdings? No. The same Wall
Street Journal article points out that, before this year’s debacle, in the three
years from 2009 to 2012, TIPS returned 44%, which works out to an annual return
of 12.9%, which, in bond terms, if a terrific performance. Even after this year’s 7% hit, TIPS are up
34% over the last three years, which works out to an annual return of 7.6%. This remains an outstanding return for a credit instrument with no real default risk. I’m happy, bordering on the ecstatic, with
the four year return on TIPS and, if you’ve been holding them, you should be,
too; this is investing, not trading!
Note also, in one of those “not for nothing” observations,
that since I wrote the aforementioned 6/26/13
piece, TIPS are up a touch. The ETF was
trading at 110.72 then and it is at 111.23 as I write this, plus they’ve paid
five dividends.
Why do I insist on holding onto my TIPS? Aren’t we experiencing conditions that
continue to argue against TIPS? If I
were inclined to trade major portions of my portfolio, I might, and only might,
be tempted to get out of TIPS with the hopes of getting in again at a lower
price. But I’m not trading my TIPS
because I decided long ago that TIPS make sense in our economic environment for
long term investors who are either very risk averse or who simply want a buffer
against several nasty possibilities in the financial markets.
I agree that, at this juncture, those horribles, such as
inflation or a plunge in the stock markets, do not look imminent, though I am
starting to think the probability of the latter is increasing. However, unlike those who pretend to be for
a living, I realize that I am not clairvoyant.
The older I get, the more I realize I don’t know, especially about the
short term movements of the financial markets.
I am about as likely to be right as I am to be wrong on any short to
intermediate term call in markets, as are those who pretend they can see the
future, and I am not willing to bet my long term investment results on such
fuzzy odds. If I were inclined to trade
these things, I would be about as likely to get out at a bottom and in at a top
as I would be to get out at a top and in at a bottom.
So, yes, I continue to hold my TIPS. They have delivered a near spectacular risk
adjusted return over the long period I have held them and I expect them to do nearly
as well over the similarly long anticipated remainder of my holding
period. While economic and financial
conditions right now do not favor TIPS, things change fast. And, despite their high opinions of their own
prognosticatory skills, the “experts” rarely can tell you, with any degree of consistency,
when those changes will come.
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