Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / The TIPS ETF That Is Beating the New Fed Reality
Transcript
- Lucas: So the ten-year breakeven inflation rate just slipped to 2.25 percent. That is the lowest level since January. And the market is sending a pretty clear signal — investors think the Fed under Chairman Warsh is going to be hawkish enough to keep inflation in check. Luna: Right — breakeven is basically the bond market's inflation expectation. So lower number means less fear. But here's what's interesting: TIPS are still crushing it this year. Lucas: Exactly. Let's put a number on it. The iShares TIPS Bond ETF — ticker T-I-P — is up about 5.2 percent year-to-date through mid-June. That's more than 300 basis points ahead of the Bloomberg US Aggregate Bond Index. And flows into TIPS ETFs hit 8.4 billion dollars in May alone. Luna: So investors are piling into TIPS even as inflation expectations fall. That feels counterintuitive. Why own an inflation-protected bond if you think inflation is going to stay low? Lucas: Great question. The first answer is real yields. TIPS are tied to the Consumer Price Index, but they also pay a fixed coupon — the yield on top of inflation. When the Fed raises rates, nominal bond yields go up, but TIPS yields go up too, because the market reprices the real rate component. And real yields have been climbing. The ten-year TIPS real yield is now around 1.7 percent. That's the highest since 2009. Luna: So for someone buying TIPS today, you lock in a guaranteed 1.7 percent above inflation. That's a very attractive real return compared to the last decade. Lucas: That's the core of it. And the second factor is the Fed's new hawkish posture. Chairman Warsh signaled at the June FOMC meeting that he's comfortable with rates staying higher for longer. The market interpreted that as a commitment to keep inflation anchored. That actually reduces the risk of an unexpected inflation spike, which is the main reason to avoid long-term nominal bonds. Luna: Right — because if you hold a ten-year Treasury at 4.2 percent and inflation jumps to 3.5 percent, your real return is only 0.7 percent. But with TIPS, you get the CPI adjustment plus that 1.7 percent real yield, so you're protected. Lucas: Bingo. So what we're seeing is a rotation within fixed income. People are moving out of nominal Treasuries and into TIPS, not because they expect runaway inflation, but because they want a certain real return. It's a conviction trade on real yields, not on inflation itself. Luna: Well, and if our conversations about inflation and your money have helped you think about your portfolio differently, that is exactly the kind of thing that keeps this show going. We keep it ad-free because listeners like you chip in at buy me a coffee dot com slash fexingo. No pressure, but every bit helps us keep digging into data like this. Lucas: Yeah, it really does. And speaking of digging into data — let's look at how the TIPS ETF actually works. The iShares TIPS ETF holds about fifty-five individual bonds, all with maturities from one to thirty years. But the key metric is the average duration, which is around 6.8 years. Luna: Duration — that's interest rate sensitivity. So longer duration means the fund is more sensitive to changes in real yields. Lucas: Right. And because real yields have been rising, a long-duration TIPS fund would actually suffer price losses. But the TIPS ETF has a moderate duration — 6.8 years — so the price impact is manageable, and the coupon income plus inflation accrual more than offsets it. That's why the total return has been positive. Luna: So it's not just about buying any TIPS product. You have to be mindful of duration. A long-duration TIPS fund could still lose money if real yields keep climbing. Lucas: Exactly. And that's where some investors trip up. If you want TIPS exposure, a broad-market ETF with intermediate duration is probably the sweet spot right now. You get the inflation protection and the income, but you're not taking massive interest rate risk. Luna: What about the alternative — buying TIPS directly from the Treasury at auction? Some people prefer that to avoid the expense ratio. Lucas: Sure. You can buy individual TIPS at auction. The expense ratio on the ETF is only 0.19 percent, so it's not a huge drag. But with individual bonds, you have to reinvest the coupons and deal with the inflation adjustments yourself. For most people, the ETF is simpler. Luna: And you get diversification across maturities. You're not betting on one particular year. Lucas: Exactly. Now, let's tie this back to the broader market. The S&P 500 hit 7,500 this week — a new all-time high. Small caps are down, gold is sliding. The market is pricing in a soft landing with the Fed in control. That environment is great for TIPS because real yields are elevated and inflation is expected to stay near the Fed's target. Luna: So TIPS are kind of the perfect bond for this moment — not too hot, not too cold. Lucas: They are. And the flows confirm it. May's 8.4 billion into TIPS ETFs was the third highest month on record. That's not retail day traders. That's institutional money — pension funds, endowments, insurance companies — making a structural allocation adjustment. Luna: Because they need to match long-term liabilities with a certain real return. With nominal bonds, that real return is uncertain. With TIPS, it's locked in. Lucas: Exactly. So the question for our listeners is: does TIPS exposure make sense in your portfolio? If you have a long-term horizon and you want to protect purchasing power without betting on interest rates, the answer is probably yes. Luna: And how much? I've seen some advisors recommend allocating 10 to 20 percent of fixed income to TIPS right now. Lucas: That sounds reasonable. But it depends on your inflation sensitivity. If you're retired and living off your portfolio, you're more vulnerable to inflation. You might want a higher allocation. If you're young and heavily in equities, TIPS are less critical — you have growth to outpace inflation. Luna: So the takeaway: TIPS ETFs are beating the bond market because real yields are attractive and the Fed is hawkish. And the flows suggest this isn't a flash in the pan. Lucas: Right. The key number to watch is the ten-year TIPS real yield. If it stays above 1.5 percent, demand will likely remain strong. If it drops back toward 1 percent, the trade gets less compelling. But for now, TIPS are delivering exactly what they promised: a real return with inflation protection. Luna: And with the Warsh Fed signaling higher for longer, TIPS might be the bond strategy for the rest of 2026. Lucas: I think that's right. Next episode, we'll look at how TIPS compare to Series I savings bonds — another inflation-protected option. But for now, if you hold bonds, it's worth asking whether you're getting paid enough in real terms. Luna: And if you want to support our deep dives into data like this, you know where to find us. Lucas: Yeah, buy me a coffee dot com slash fexingo. Helps us keep the show ad-free and independent. Thanks for listening.