DBS Chief Investment Office has identified Treasury Inflation-Protected Securities (TIPS) as a promising investment option in the current economic climate marked by geopolitical tensions and inflationary pressures. TIPS, government-backed securities with maturities of 5, 10, and 30 years, adjust their principal and coupon payments in line with inflation, offering a hedge against stagnant growth and rising prices.
The report from DBS highlights that TIPS have previously underperformed during the inflation spike of 2022 due to negative real yields. However, with the US Federal Reserve now cutting rates, real yields have stabilised, presenting a more favourable environment for TIPS. “Unless the Fed makes a complete u-turn and hikes rates again, the biggest headwind for TIPS is largely behind us,” the report states.
DBS also points out that breakeven inflation rates have consistently underestimated actual inflation, suggesting that TIPS could offer valuable optionality in uncertain times. The bank notes that TIPS yields and gold, both inflation hedges, have diverged since 2022 due to geopolitical events, but expects this decoupling to be temporary.
The report concludes that ultra-long duration TIPS are particularly attractive due to the steep yield curve, providing adequate compensation for investors. Given the US’s debt sustainability concerns, TIPS offer a unique advantage as their principal adjusts with inflation, making them a robust choice for those seeking to protect against stagflation.
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