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Tips, or Treasury Inflation Protected Securities, are bonds backed by the US Treasury which track inflation. They are seen as low risk because of the low risk of default by the US government.
They are normally, 5-year, 10-year and 30-year bonds, whose principal is adjusted on a regular basis to reflect changes in the consumer price index (CPI). At maturity, the securities can be redeemed at face value or at their inflation-adjusted value, whichever is greater.
In February 2013 it was reported that enthusiasm for investing in Tips had soured. An index of Treasury Inflation Protected Securities had recorded a total return of minus 1 per cent in 2013, outpacing the 0.81 per cent slide seen for the cash or nominal Treasury index, according to Barclays.
The slide was attributed to their strong performance in the previous few years which had pulled their real or inflation-protected yield – which moves inversely to price – below zero, entering negative territory. Much of the capital appreciation for Tips up to 2013 had been a function of bond prices rising as their yield has turned negative.
Michael Pond, head of global inflation-linked research at Barclays, told the FT that Tips might struggle in 2013 after several strong years of performance. He added: “If bond yields go up, Tips can record a negative return. Tips funds may rally as inflation rises, but ultimately lose out if real rates rise amid a wider bond market sell-off.”