The Benefits of Active TIPS Management

After years of elusive inflation, evidence of higher inflation has begun to take shape.

Against a backdrop of synchronized global economic growth, indicators ranging from tight labor markets to rising oil prices suggest that developed economies are transitioning from an environment in which inflation was consistently below central bank targets to one in which it is increasingly more likely to meet and potentially exceed them.

With inflation more normalized and seemingly biased higher, investors have turned their attention to fixed income vehicles that seek to reduce portfolio risk to the deleterious effects of rising inflation. Inflation-linked bonds, which in the U.S. are known as Treasury inflation-protected Securities (TIPS), are one prime example. As the principal value and coupon payments of these instruments rise and fall with inflation, TIPS hold obvious appeal for investors looking to reduce inflation risk, like those saving for retirement or global investors storing purchasing power in U.S. dollars. In addition, given the differentiated response to inflation vs. other asset classes, they also offer potential diversification benefits to portfolios.

The TIPS market stands at approximately $1.2 trillion with just over 40 TIPS currently outstanding, leading some to wonder about the role active management can have in a market with seemingly little selection. However, we believe TIPS are well suited for active management.