A "Tip" from Retirement Watch

08/21/2020 5:00 am EST

Focus: BONDS

Robert Carlson

Editor, Retirement Watch

A rise in gold often means investors anticipate higher inflation and a weaker dollar. Broader commodity prices also indicate prospects for inflation and economic growth, notes Bob Carlson, editor of Retirement Watch.

Commodity prices declined the last few years, but they started recovering recently; that hints that investors are anticipating higher inflation and perhaps modest economic growth.

Treasury Inflation-Protected Securities (TIPS) are another good market indicator of inflation. After years of stagnation, TIPS steadily increased in 2019 and are rising faster in 2020.

Taken together, the markets warn us to be prepared for something we haven’t seen for a while: stagflation. You might remember stagflation from the late 1960s and the 1970s. It is a combination of weak economic growth (stagnation) and higher inflation. It is not a sure thing that stagnation is on the way, but it is a good probability.

The Federal Reserve is going to keep buying securities, increasing its balance sheet and providing the markets and economy with liquidity. The federal government also is likely to keep providing stimulus for households and businesses for as long as the pandemic is stifling the economy.

The effects of the pandemic and the continuing economic damage from the financial crisis are obstacles to strong economic growth. But the stimulus measures, especially the Fed’s monetary policy, put upward pressure on inflation.

In fact, the Fed and other central banks would like to see higher inflation. The result of the two sets of forces is stagflation. Of course, stagflation isn’t a sure thing. The stimulus measures or the end of the pandemic could boost the economy.

Whatever happens with the economy, higher inflation is looking more likely at some point in the next few years. I want more inflation protection in the portfolio, plus an additional safe diversification position. Treasury Inflation-Protected Securities (TIPS) are the best way to achieve those two goals today.

I recommend the SPDR Portfolio TIPS ETF (SPIP). The fund tracks the Bloomberg Barclays U.S. Treasury Inflation-Linked Bond Index. It has very low fees, which gives it an advantage over competing funds.

The fund is up 9.17% for the year to date. Its yield is 1.48%. Another good choice is iShares TIPS Bond (TIP), but SPIP has lower fees and a slightly higher return for most time periods.

If you prefer an open-end mutual fund, T. Rowe Price Inflation-Protected Bond (PRIPX) and Vanguard Inflation-Protected Securities (VIPSX) are good choices. The T. Rowe Price fund has the higher return of the two.

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