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08/29/2002 12:00 am EST


Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

Marilyn Cohen, noted columnist for Forbes, author of The Bond Bible, and a bond portfolio manager for individuals, has a tip for investors – TIPS that is – or Treasury Inflationary Protected Securities. The return on these bonds are adjusted according to changes in the consumer price index.

“Considering the last two-and-a-half-year run in the bond market – we now see four-decade lows in many yields – I think all we can expect going forward is to collect our coupons. So we have to start looking for other ideas. One is TIPS – Treasury Inflationary Protected Securities. This is a relatively new investment product. I think this is one of the better ideas for individuals who want to take out insurance on their portfolio. While rates could temporarily go down in the event of war in Iraq or - God forbid - another terrorist attack, I think Treasury yields will start to slowly rise. I don’t expect inflationary, double-digit rates, but I think we are past the low in yields and that from here rates will increase. As such, I think TIPS are a really good idea.”

"TIPS trade a bit differently than other products. What you see is a nominal yield (your coupon based on the price), which is relatively low. But what happens with TIPS is that these bonds adjust for inflation based on the consumer price index – hence your inflationary hedge. The most any bond portfolio should hold is 10% to 15% of these.  The reason is that when you take out insurance, you hope you're wrong – but you're glad to have the insurance if something really bad happens.”

"You are not going to get rich from TIPS, but they will hedge you against inflation. As the CPI goes, so will your rate on these bonds. You can buy these in the market from your broker or from Treasury Direct just as you would buy T-bills or short-term Treasury notes or bonds. They are available with coupons ranging from 2009 to as far out as 2032. In addition, if you don’t want to buy individual bonds, but would prefer the safety of a professional bond manager, I’d suggest Vanguard Inflationary Protected Securities Fund, a relatively new fund that holds a variety of short, intermediate, and long-term TIPS.”

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