Forget TIPs: No Need for Inflation-Protected Bonds

Focus: FUNDS

John Bonnanzio Image John Bonnanzio Editor, Fidelity Monitor & Insight

Here’s the non-technical reason why we downgraded Fidelity's Inflation-Protected Bond (FINPX) and its related Index funds to "OK to Sell" —  with CPI mostly running under 2% for years, and with no sign that inflation is poised to accelerate, “paying” for inflation protection does not make sense, asserts John Bonnanzio, editor of Fidelity Monitor & Insight.

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Of course, today’s low-rate, low inflation environment may not last forever. But for now, many factors are exerting downward pressure on inflation, thereby keeping low-yielding bonds relatively attractive.

These conditions include tepid economic growth, cheap domestic energy, a large contingent labor force, low capacity utilization, and technology-driven efficiencies that reach from the factory floor through distribution channels to the end user. (Think Amazon.)

So, with the notable exceptions of health care and college (where the government is working on your behalf to help rein-in costs!) everything from the price of a dozen eggs to your smartphone plan is more affordable.

None of the above has been lost on investors, including bond-buyers, gold/silver bugs, and those seeking 30-year mortgages. With yields, prices and interest rates all in retreat, the market is signaling that it sees low inflation and slow economic growth ahead.

As for the Treasury Inflation-Protected Securities (TIPS) that are the backbone of Fidelity’s aforementioned fund, they operate a bit differently than regular bonds: Twice a year, the Treasury adjusts a TIPS’ principal (par value) to reflect inflation, or deflation.