The government started issuing Treasury Inflation Protected Securities (TIPS) in March, 1997 to offer investors protection from unexpected increases in inflation. Since inception in March, 1997, the Barclays Capital US TIPS Index has returned 6.5% per year versus 6.2% per year for the 5-Year Treasury. The annualized volatility of monthly returns was 6.1% and 4.7%, respectively. Because TIPS have a limited history, it is even more difficult than usual to make assumptions about the future by drawing from historical data. This paper examines the available information related to expected future performance of TIPS and whether they belong in well-diversified portfolios.
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