Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / TIPS Bonds Are the Inflation Hedge Nobody Talks About
Transcript
- Lucas: Gold just had its worst week in years. The GLD ETF lost about two and a half percent in five days, and gold miners, through the GDX ETF, dropped over eight percent. That's a nasty sell-off for what a lot of people call an inflation hedge. Luna: And yet inflation is still running hot. The April CPI came in at 332.4 — up from 330.29 in March. That's a month-over-month increase of about 0.65 percent, which annualizes to almost eight percent. Lucas: Right, so gold gets hammered while prices keep climbing. It's a reminder that gold is not a pure inflation trade — it's a fear trade, a real-rates trade, a currency-confidence trade. If the Fed even hints at raising rates, gold tends to drop, because higher rates make non-yielding assets less attractive. Luna: And the Fed minutes from this week showed officials see a rate hike ahead if inflation stays elevated. So that hawkish tone is probably the catalyst for gold's slump. Lucas: Exactly. So if you're a listener who wants to protect purchasing power without the volatility of gold, there's a much more boring, but actually more effective, instrument: Treasury Inflation-Protected Securities — TIPS. Luna: I think a lot of people hear TIPS and just gloss over. But they're basically the only security that guarantees your principal keeps up with inflation. Lucas: That's the key. TIPS are bonds issued by the U.S. Treasury, and their principal adjusts with the Consumer Price Index. If CPI goes up, the principal goes up, and your interest payments — which are a fixed percentage of that adjusted principal — go up too. At maturity, you get back the higher of the original principal or the inflation-adjusted principal. So your purchasing power is never eroded in nominal terms. Luna: And right now, the real yield on TIPS is actually positive again. The ten-year TIPS real yield is around 1.6 percent after inflation. That's a lot better than the negative real yields we saw in 2021 and 2022. Lucas: That's a huge shift. For years, investors were paying the government to protect them from inflation — they accepted negative real yields. Now you get a real return on top of the inflation adjustment. If you lock in a ten-year TIPS at today's levels, you're guaranteeing that your money grows faster than inflation for a decade. You can't get that from a savings account or a money market fund. Luna: But there's a nuance that a lot of people miss. With TIPS, you owe taxes on the inflation adjustment each year, even though you don't receive that cash until maturity. That's called phantom income. Lucas: Yeah, that's the single biggest downside. If you hold TIPS in a taxable account, you're paying tax on the increase in principal every year. That can eat into your real return a bit. The fix is to hold them inside a tax-advantaged account like an IRA or a 401, where the adjustment grows tax-deferred. Luna: Or you could buy I Bonds, which are also inflation-adjusted but defer taxes until redemption and have no phantom income issue. Lucas: I Bonds are great for smaller amounts — you're capped at $10,000 per year per Social Security number. TIPS have no purchase limit, so for larger portfolios, they're the way to go. And right now, the breakeven inflation rate — the market's expectation for average inflation over the next decade — is 2.44 percent on the ten-year. That's down from 2.49 percent yesterday, meaning the market is pricing in slightly lower inflation ahead. But if you think inflation will average more than 2.44 percent, TIPS are a bargain. Luna: So how would someone actually buy TIPS? It's not as straightforward as buying a regular Treasury bond. Lucas: It's pretty simple once you know where to look. You can buy individual TIPS at TreasuryDirect.gov, or you can buy ETFs like TIP or SCHP. The ETF route gives you instant diversification across maturities. But if you want a specific maturity, buying individual bonds at auction is easy — the Treasury issues new five, ten, and thirty-year TIPS regularly. The next ten-year TIPS auction is coming up in June. You place a non-competitive bid, and you get the yield determined at auction. Luna: And unlike gold, you don't have to worry about storage, insurance, or price volatility driven by central bank policy. TIPS are backed by the full faith and credit of the U.S. government. Lucas: Right. Gold is an emotional asset. TIPS are a contractual one. If you believe the government will continue to pay its debts and that CPI measures inflation accurately, TIPS are a near-perfect hedge. And with the Fed possibly hiking rates again this year, TIPS may even benefit — because if the Fed raises rates to fight inflation, that inflation adjustment actually accelerates the principal growth. Luna: It's almost counterintuitive: a tool that works better when the central bank is actively trying to contain prices. Lucas: Exactly. So for listeners building a retirement portfolio or just trying to preserve cash that they can't afford to lose purchasing power on, TIPS deserve a serious look. Especially now that real yields are positive. I'd argue they should be a core holding, not just a tactical play. Luna: Any final thoughts on sizing? What's the right allocation? Lucas: A good rule of thumb is to allocate a percentage equal to your age minus 20 to inflation-protected bonds. So if you're 50, about 30 percent of your fixed income in TIPS. But the key is to start small, understand the tax implications, and remember that TIPS are a long-term hedge. They're not for timing the market. They're for sleeping at night when inflation surprises to the upside. Luna: And given that the core PCE — the Fed's preferred inflation gauge — is still running at 129.3, up from 128.9 last month, surprises are definitely possible. Lucas: Right. The Fed may have paused, but the underlying price pressure hasn't vanished. TIPS are the quiet, steady option. And sometimes the boring choice is the smartest one.