Download How Fed policy affects Treasury Inflation-Protected

Education Series
Historically, Fed policies have influenced the
availability of money and credit, affecting both
economic growth and inflation. Because the
value of TIPS changes with the rate of inflation,
their performance is directly linked to the Fed’s
monetary actions.
WHAT IT MEANS FOR INVESTORS
Although TIPS may perform better in certain
environments, their low correlation with other
types of investments, such as equities, can help
reduce overall portfolio volatility. Essentially
TIPS have the potential to be an effective
diversification tool in any phase of
the economic cycle.
Fed policy: Monetary easing continues despite
the potential for inflation.
1970s
Easy monetary policy to
stimulate growth
TIPS: TIPS may benefit early in this cycle
from capital gains through monetary easing,
and later from upward adjustments to principal
and interest when inflation rises.
Rising inflation spurs
Fed tightening
Fed policy: As inflation rises, the Fed begins
to tighten, but not aggressively enough to halt
the rise in inflation.
TIPS: TIPS should benefit from inflation
adjustments that boost income and principal –
helping to preserve purchasing power.
Fed policy
cycles
Fed eases as inflation slows
Fed policy: Fed lowers real interest rates
to stimulate growth as inflation falls.
TIPS: Even though falling real rates
should lead to capital gains for TIPS, a
relatively low inflation rate means little
adjustment to principal.
1980s
WHAT THIS CHART SHOWS
1990s
TIPS are more likely to perform well –
relative to various asset classes – in
periods of monetary easing and increasing
inflation. However, they have the potential
to add value in any environment.
1960s & now
How Fed policy affects Treasury
Inflation-Protected Securities (TIPS)
Tight monetary policy
continues
Fed policy: Fed maintains higher real
interest rates as inflation falls.
TIPS: While TIPS can provide relatively
high income, rising real rates may generate
capital losses. Slowing inflation late in
the cycle would ultimately lead to lower
adjustments to principal.
Past performance is no guarantee of future results. Treasury Inflation-Protected Securities (TIPS) are inflation-indexed bonds issued by the U.S. government. They are fixed income
securities whose principal value is periodically adjusted according to the rate of inflation, which will affect the interest payable on them. Repayment upon maturity of the adjusted principal value is
guaranteed by the U.S. government. Neither the current market value of inflation-indexed bonds nor the share value of a fund that invests in them is guaranteed, and either or both may fluctuate.
Diversification does not ensure a profit or eliminate the risks of investing.
While inflation-indexed bonds, including TIPS, are structured to provide protection against inflation, the value of these bonds is likely to change in response to changes in “real” interest rates
(current market interest rates minus the expected impact of inflation). In other words, a rise in real interest rates can lead to a decrease in the value of inflation-indexed bonds. A decline in real interest
rates could produce the opposite effect.
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