If real rates begin to rise with higher growth expectations, the fund can hedge interest rate risk and seek to protect capital by shortening duration using derivatives.
We may also use rate derivatives. We believe this additional flexibility provides potential to enhance returns at the margin based on our broader economic and credit views.
Mutual funds that invest in bonds can lose their value as interest rates rise and an investor can lose principal. Stock markets, particularly foreign stock markets, are volatile and can decline significantly in response to adverse economic, issuer, political or regulatory changes. Exposure to commodity markets may subject the fund to greater volatility than investments in traditional securities.
Derivatives, primarily futures and forward contracts, generally have implied leverage a small amount of money to make an investment of greater value. Barclays US Treasury Inflation Protected Securities Index covers the most liquid portion of the global investment grade fixed-rate bond market, including government, credit and collateralized securities.
Indexes are unmanaged and do not incur fees. It is not possible to invest directly in an index. This paper is provided for informational purposes only and should not be construed as investment advice. Investment decisions should consider the individual circumstances of the particular investor.
Investment recommendations may be inconsistent with these opinions. There can be no assurance that developments will transpire as forecasted and actual results will be different. Data and analysis does not represent the actual or expected future performance of any investment product.
We believe the information, including that obtained from outside sources, to be correct, but we cannot guarantee its accuracy. The information is subject to change at any time without notice. Investing involves risks, including risk of loss. Commodity, interest and derivative trading involves substantial risk of loss. There is no guarantee that any investment objective will be realized or that the strategy will generate positive or excess return.
Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results. All returns shown are hypothetical, simulated, and are not an indicator of future results. The current year breakeven rate of 1. An investor that only allocates to regular bonds is vulnerable to higher than expected inflation, yet solely using TIPS would result in underperformance if future inflation is less than expected.
I own an equal amount of regular and inflation-protected bonds to avoid making a bet on the direction of inflation. I hope these posts were useful and feel free to get in contact if you have any questions. Get updates for new research posts:. The home page video shows the difference in cumulative fees paid. With the year inflation breakeven near historical levels but somewhat above historical inflation, we would consider TIPS about fairly valued now relative to nominal Treasuries.
If inflation is a particular concern, it would be reasonable to substitute TIPS for some Treasury exposure. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes.
Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly.
Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges.
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