Look at how TIPS behaved during the financial crisis of 2008/2009. They were highly correlated to stocks on the way down. Furthermore, that was a deflationary crisis, so TIPS holders received zero to negative inflation adjustments. On the other hand, nominal Treasuries went up.Inflation adjusted bonds may or may not do better than nominals but they are far more secure than nominals. In 2022, when inflation was 8-9%, both stocks and nominals were suffering large double digit losses in real terms. I would have loved to have had TIPS at that time, even at zero yield. There was no reason to assume that the market would recover quickly and that inflation would be brought under control as efficiently as it was. Stagflation could wreak havoc on a portfolio of stocks and nominal bonds, whereas TIPS at current yields would do just fine.
I think the logic assumes that real rates are more tightly correlated with growth expectations than nominal rates, and so they are less effective/important at offsetting the equity risk in your portfolio. You primarily need TIPS to protect against an inflation shock that ravages nominal bonds. Equities may take a momentary hit while the Fed fights fire with fire (2022) but with a high enough equity allocation you only need the TIPS to see you through to the rebound, rather than a permanent replacement of lost purchasing power. I’m not aware of any Japan scenario where stocks took decades to recover but inflation adjusted bonds did better than nominals.
My reason for holding fixed income is to protect my lifestyle against unpredictable, rare, dire events. Over the course of decades those can certainly happen, and their nature, probability, duration and severity are unknown. Who would have thought in 2019 that we were on the verge of a pandemic that would kill over a million Americans and last 2-3 years, when the last such event happened over a century ago? If one accepts that rationale, it makes sense that the more risk one is taking, the more secure one would want their "insurance". Whether or not TIPS will outperform riskier nominals under normal circumstances is unknown and, to me, irrelevant. Money I am willing to risk is in the stock market. Currently TIPS are offering a guaranteed 2-2.5% real return, state tax exempt. That is great insurance.
I know this is a TIPS cheerleading thread and folks will disagree with me, but I think it’s prudent to hold both TIPS and nominal Treasuries in the fixed income portion of one’s portfolio.
Statistics: Posted by aj76er — Sun Dec 29, 2024 10:33 am