TIPS: Good Buy or Not?

A side effect of the precipitous drop in the price of crude oil over the past few months has been the lowering of inflation expectations by investors. This has translated into severe underperformance of Treasury Inflation Protected Securities, better known as TIPS. A debate is currently raging among fixed income investors as to whether the sector is now a buy. Recently, Bill Gross of Janus Capital said on CNBC that TIPS “look great,” while Jeffrey Gundlach of DoubleLine Capital stated that “TIPS are for losers.”  We watched TIPS for much of the year and hesitated on entering the space due to levels that we felt were close to fair value. Now, TIPS have become more attractive as the difference between the yield on a 10 year TIPS and a 10 year nominal Treasury has fallen to a level we haven’t seen since 2010 (see chart below). The time to buy TIPS is when investors underestimate future levels of inflation. Certainly, there are numerous headwinds for inflation during 2015 such as a stronger dollar, lower energy prices and low velocity of money. But not everything is looking gloomy. Consumers are employed, confident and spending again, and most corporate sectors are investing in M&A. So, are TIPS a buy? Not yet, but if inflation expectations continue to fall, don’t be surprised to see TIPS show up in SNWAM portfolios.