Trust in US TIPS to beat inflation
In an inflationary market TIPS, US Treasury Inflation-Protected Securities, are most compelling says Cris Sholto Heaton.
![red and green financial arrows up and down. Vector graph with green and red arrows over bar chart](https://cdn.mos.cms.futurecdn.net/nNpSuapiKTaxaDJfpCJxLZ-415-80.jpg)
Bond yields have ticked down recently as investors conclude that central banks have finished hiking. Whether this is right remains to be seen, but my long-standing view is that central banks are always too quick to cut and too slow to hike and so I’d guess that markets are probably correct.
However, this has little immediate impact on the MoneyWeek asset-allocation strategy that I’ve been reviewing in the last few weeks, since we try not to forecast too much: our goal is to have a portfolio fit for all likely outcomes. With that in mind, the 2%-2.5% real yield on inflation-linked bonds still looks better than conventional bonds.
Government-backed linkers are an unusually generous gift to investors since they promise to pay you back in a money that retains its value, rather than money that is debased by inflation. It is true, of course, that politicians could potentially fiddle the inflation statistics to some extent, but if they are doing that, actual inflation is likely to be so bad that conventional bonds will lose even more value.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
![https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg](https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748-320-80.jpg)
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
There are fewer choices for inflation-linked bond exchange-traded funds (ETFs) than conventional bond ETFs because this is a smaller market, but what’s available is still as much as we need. Most obviously for the UK investor, we have iShares £ Index-Linked Gilts (LSE: INXG). Given that most of us will have liabilities and costs in sterling and be at risk from UK inflation, in principle, it makes sense to have our investment indexed against that. However, as I discussed last time, the UK linker market is structurally messy and so I prefer US Treasury Inflation-Protected Securities (TIPS).
US TIPS Funds
iShares $ Tips ETF Total return (%) in sterling, hedged and unhedged
With TIPS we have a choice of broad funds such as iShares $ Tips (LSE: ITPS), Lyxor Core US Tips (LSE: TIPG) and SPDR Bloomberg US Tips (LSE: UTIP).
There are also a few funds that break the market down by maturity, as with the conventional bond ETFs – for example iShares $ Tips 0-5 (LSE: TP05) or UBS Bloomberg Tips 10+ (LSE: UBTL).
There are also some euro ETFs, such as iShares € Inflation-Linked Government Bond ETF (LSE: IBCI), which is mostly French and Italian bonds and global ETFs, such as iShares Global Inflation-Linked Government Bond ETF (LSE: SGIL), which is around 50% US bonds. But for our purposes, these add little.
First, US linkers have the highest real yields. Second, US bonds are a safe-haven asset – they tend to rally during crises, which is another attractive reason to hold some.
Several of these ETFs are available as currency-hedged funds, such as iShares $ Tips GBP Hedged (LSE: ITPG). Hedging conventional bonds can make sense – the yield you get from bonds can easily be swamped by currency losses if exchange rates move against you. However, in this situation, I see a good argument to hold US linkers unhedged. If UK inflation turns out to be much worse than US inflation, we would expect sterling to weaken against the dollar over time. ITPS has beaten ITPG over five years for this reason (see chart above).
Put all this together, and we will continue to hold 10% in ITPS.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Related articles
- Index-linked bonds could prove a costly inflation hedge
- Are bonds bouncing back?
- What you need to know about investment funds
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.
Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.
He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.
-
What is an offset mortgage and should you consider one?
Mortgages Offset mortgages are a good way to put your money to work. We explain what they are and if they might work for you.
By Ruth Jackson-Kirby Published
-
Tesla and Alphabet announce results – should you invest in Big Tech?
How profitable are the world’s biggest tech companies? We share the latest so far this earnings season.
By Katie Williams Published
-
UK mid-caps: an improving outlook
UK mid-caps have perked up and the rally may run further, but long-term investors should remain selective
By Cris Sholto Heaton Published
-
The tobacco industry is going smoke-free - how to profit from it
Tobacco companies have realised their traditional products are on the wane. But new opportunities have opened up – and should prove lucrative
By Rupert Hargreaves Published
-
Is it time to invest in creative industries?
Any industrial strategy should not overlook the creative industries, one of our top national assets
By David C. Stevenson Published
-
Is Mercia Asset Management set for success?
Mercia Asset Management helps the government fund smaller companies in Britain’s regions. Should you invest?
By Rupert Hargreaves Published
-
British stocks set for a boost
British stocks are due for a bounce as the UK looks more stable compared to many economies
By Alex Rankine Published
-
Ocado shares jump by a fifth
Ocado takes a turn for the better after attractive profit forecasts were announced
By Dr Matthew Partridge Published
-
The AI boom is on borrowed time
The hype around the AI boom could be on its way out – but why?
By Alex Rankine Published
-
Diploma: a blue-chip set for strong growth
Diploma, whose niche products include seals and fasteners, serves an array of growth markets. Should you invest?
By Dr Mike Tubbs Published