Choppy Waters, go to port

by | 09.29.2022 | Lime Newsletters

Inflation Protected Treasury Securities (TIPS) – A Consideration When Everything Hurts

The markets are being hit with a combo of high inflation, rising rates, and an economy that is expected to slow further. Therefore, cash is losing value due to inflation, bonds are devaluing with rising rates, and the equity market is selling-off with lower earnings and higher discount rates.

Treasury Inflation Protected Securities (TIPS) are instruments issued by the Treasury designed to protect investors from inflation. To achieve this, the nominal value of the asset is adjusted with inflation – i.e., if inflation goes up, the value of the asset goes up proportionally – which subsequently leads to a higher coupon payment.

If your diversification strategy (e.g. holding a mix of stocks, bonds and cash) isn’t producing your desired results in the current market place, inflation protected securities may offer “protection.” TIPS may offer you an alternative protection that nominal fixed income or cash may not. 


Keep It Simple with Treasury Inflation Protected Securities– TIP and STIP ETFs

Some exchange-traded funds (ETF) offer the ability to invest in treasury inflation-protected treasury paper. TIP’s and STIP’s are highly liquid, large-cap ETFs that invest in long-term (TIP) and short-term (STIP <5yr) government debt.

Due to its longer duration, TIP has greater exposure to real rates (the difference between expected inflation and the nominal rate of conventional treasury notes or bonds). Comparatively, the STIP will materially lower exposure to real rates due to its assets’ short duration. However, both ETFs offer the same protection to inflation – as inflation rises, the value of the underlying asset is adjusted to pass-through this increase to the value of the security and subsequently a higher coupon payment.

In 2022, TIP’s and STIP’s have lost 15.5% and 7.5% year-to-date, but recovered a portion of those losses through an increase in the current yield to 7.7% for TIP and 6.7% for STIP (dividends are paid monthly). This compares well with the 28.2% loss for the TLT (>20yr Treasury bond ETF) and 12.9% loss for the IEI (3yr to 7yr Treasury bond ETF).


What could go wrong with this type of strategy?

This strategy could be a short term safe harbor, though it is unlikely to be a long term performance driver. It is likely it would lag almost every alternative asset class if inflation is tamed, the Fed stops hiking, or the market loses the fear of a recession and equities rebound.


Information on Disclosure Agreements

© 2022 Securities are offered by Lime Trading Corp., member FINRA & SIPC, NFA, Lime Advisory Corp is an investment adviser registered with the SEC. and Lime FinTech is a technology business. Collectively known as “Lime Financial” or “Lime” provide various trading, investment advisory services, and technology solutions including web and mobile trading applications, to retail and institutional investors. All investing incurs risk, including but not limited to loss of principal. Further information may be found on our Disclosures Page.

Please read the Options Disclosure Document titled “Characteristics and Risks of Standardized Options” before trading options.

Options trading entails significant risk and is not appropriate for all investors. Certain options strategies carry additional risk and investors may lose 100% of funds invested in a short period of time. Investors should consult with a tax advisor as to how taxes may affect the outcome of any options strategy. Options trading privileges are subject to Lime Trading Corp. review and approval. Transaction costs may be significant in multi-leg option strategies, including spreads and straddles, as they involve multiple commission charges.

This material has been prepared for informational purposes only and is NOT intended to provide nor should it be relied on for tax, legal, or accounting advice. Please consult your own tax, legal, and accounting advisors before engaging in any securities transactions as each individual investment(s) may result in diverse/adverse tax implications that will affect the outcome of any investment strategy. No information presented herein should be considered an offer to buy or sell a particular type of security. This is not an offer or solicitation in any jurisdiction where we are not advertised to do business. Other fees, such as regulatory, service, or other fees, may apply. Please visit our Pricing Page for further information. Investments involve risk, past performance does not represent future results. Diversification may help spread risk but does not protect in a down market. You may lose all of your investment. Investors should evaluate their financial situation, investment objectives, and goals before investing. Substantial risks are involved with electronic trading. Day trading involves significant risk and is not suitable for all investors. Please see our Day Trading Risk Disclosure Statement for more detailed information. Trading on margin is not appropriate for every investor. Please see our Margin Disclosure Statement for information on risks. System response may vary due to multiple factors including but not limited to trading volumes, market conditions, system performance, and other factors. Access to electronic services may be limited or unavailable during periods of peak demand, market volatility, systems upgrades, maintenance, or for other reasons.

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