For decades there was never much choice between whether you hold stocks or bonds in your portfolio … It was a very easy decision … You would hold 60% stocks and 40% bonds.

What made the 60/40 portfolio work so well for 40 years was that the US had natural buyers for as many Treasury bonds as the government wanted to issue …

That’s right, thanks to an agreement struck with OPEC in the 70s, global trading partners would exclusively use US dollars to settle their oil transactions and invest their excess dollars in US Treasury Bonds.

This provided the natural buyers for US debt, enabling the government to spend as much as was needed to keep their voters happy. 

Then when the stock market would crash and risk hurting the economy the Fed would print money to buy bonds from the banks who would buy stocks to support the market. 

Well, while the gravy train may be over for the government and banks, the downturn in bonds provides tremendous value for you. 

Today, we’ll take a look at how you can take advantage of Treasury Inflation-Protected Securities … 

Treasury Inflation-Protected Securities (TIPs)

TIPS can help protect against inflation over the long run, but in the short term their performance may be dictated more by overall bond price declines in the secondary market. That’s been the case so far this year. 

I believe this is an opportunity worth looking into because inflation is likely to be an ongoing concern for many years to come.

TIPs are a US Treasury security whose principal value is indexed to the rate of inflation. Now, like all fixed income bonds you have a principal payment that is returned at maturity and you receive an interest payment twice a year.

When inflation rises, the principal value is adjusted upwards to account for the rise in the core consumer price index, or CPI, that is the Fed’s measure of inflation.

Like traditional Treasuries, TIPS are backed by the full faith and credit of the US government.

Your Interest Payment Rises With Inflation

Here is a major benefit to TIPs …

If inflation rises, the interest payment you receive semi-annually is based on the higher principal amount. So, if inflation rises, so do the coupon payments. 

Below is an auction offering for the 10-year TIP that is set to be auctioned to the public on Sept. 22.

It happens to be the largest ever auction for a 10-year TIP, at $15 billion …

This 10-year TIP delivers a positive fixed interest payment of .625%, plus the core monthly inflation rate added to the principal value each month. Year-to-date CPI has increased at an annualized rate of over 5%. 

Below is an example that shows what the compounding of the additional principal value, taken from the CPI index, can do for your overall returns.

This example is simply using the Fed’s 2% inflation target, however CPI is expected to average a much higher rate in the years ahead.

Chart courtesy of Charles Schwab.

You can either open an account directly at the Fed and receive the noncompetitive auction price, which costs you nothing. This would be ideal because you would own a risk-free government guaranteed security held at the safest institution. 

For more information go to the Treasury Direct TIP Program  ….

You can also buy and hold or trade the iShares TIPS Bond ETF (TIP) 

You can dollar cost average into the TIP and automatically reinvest the dividend or receive it through a distribution directly in your account. 

Now is the time to start a program because you can get it at the low level reached during Covid …

You can also add a call-write program and reinvest the income to supersize the compounding effect.

Bring It Home

By capitalizing on an opportunity like TIPs after a $20 drop ,you take advantage of how irresponsible our government has been. 

They have printed money into oblivion and have to issue so much debt to pay for the borrowing that they have had to create new securities …

And this is one TIP that can help you beat inflation.

Live and Trade With Passion My Friend,

Griff