Would you believe the the U.S. Treasury will have issued $1.8 trillion of debt by September 2009. Most of this debt was done at a fixed rate. Now with tepid responses to the last two auctions, the Treasury is considering the issuance of TPS bonds.
First of all, what are TIPS bonds? TIPS are inflation protected bonds. TIPS pay a fixed amount over the Consumer Price Index (CPI) The first TIPS were issued in 1997.
This year the Treasury issued $6 billion of 20-year TIPS and had the highest demand in two years. Now the Treasury wants to issue 30-year TIPS to help finance our huge debt.
China which holds a large chunk of our debt favors TIPS as a way of protecting their investments from inflation.
Normally TIPS premium is 1.88%, which means that an investor will get an added yield of 1.88% over 10 years.
Trading in TIPS has become very volatile in recent weeks with gaps ranging from 1.52% to 1.90%.
If you are looking for a way to hedge your bond portfolio against any coming inflation, the purchase of TIPS bonds may be the way to go.
Would you buy TIPS bonds?
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