Treasury Inflation Protected Securities to Hedge against Inflation

The government has created record in spending which include $108 trillion in unfunded liabilities for social security, Medicare plus new universal healthcare benefits. This has put the nation on risk. With the interest rates close to zero, the Federal Reserve cannot take one conservative step - reducing short-term rates - to bring back the weakened economy.

In this difficult economic crash or double-dip recession, politicians - with the reluctant guidance of the Fed - might opt to spend even more massively to attempt to jump-start the financial system. The outcome could be stagflation: slow growth with higher inflation.

Inflation is the curse to the debt holders. However it is a blessing to the debtors - and Uncle Sam is the biggest of them - as they can pay the fixed obligations with increasingly worthless currency.

Are you scared of growing inflation? And want to make sure better profits over inflation from your savings at small amount of risk? In that case Treasury Inflation Protected Securities (TIPS) can be the most excellent investment choice for you.

Treasury Inflation Protected Securities (TIPS) are often known as Treasury Inflation Index Securities and Real Return Bonds (RRB). TIPS are 'safest of the safe'. There is minimum downside risk on investing. TIPS are long-term fixed income investments protected against fluctuations in the rate of inflation.

But why employ TIPS as your protect against inflation, rather than a traditional hedge, such as precious metals? You can benefit from both as your hedge against inflation. But always remember, precious metals like gold and silver are less than complete hedges.

Gold and silver have performed very well over the last 10 years. Gold has more than quadrupled. Silver has done still better. But 20 years before that were a total disasters.

But no matter if inflation is low or high, TIPS will protect you from the risk on top of your investment. How?

Here are the benefits of buying Inflation-Protected Treasuries:

Regular Interest Payments: Just like a regular Treasury bond, TIPS pay interest regularly once in six months. However unlike traditional bonds, your principal grows every year by the amount of inflation, as measured by the consumer price index (CPI). That is when inflation rate is up; value of TIPS is also increased automatically. In other words, inflation protection is available on both capital and investment. The interest paid once in every six months as well rise by the amount of inflation.

Tax Advantages: The interest you receive from TIPS investments are freed from state and local income taxes (but not federal).

TIPS are moreover less volatile when compared to the traditional bonds. The yield on these TIPS funds is at present about 2.5% (plus whatever inflation is going forward).

Another influential reason to think about adding TIPS to your portfolio is the great portfolio diversification benefits they bring. This reduces the total risk and / or instability of your portfolio over time. TIPS bond yields are low or negative correlation with the performance of many other traditional investments such as shares and regular bonds.

Rising inflation chances are good for TIPS returns, but in the short period are negative for the returns of stocks and bonds and vice versa.

TIPS can be bought in three ways:

1. Directly: One can purchase TIPS directly from the U.S. Treasury or through a bank, broker, or dealer. You can understand more about buying TIPS directly at http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_buy.htm

2. Through the Vanguard Inflation-Protected Securities Fund (VIPSX).

3. Through its ETF equivalent - the iShares Barclays TIPS Bond Fund (NYSE: TIP)

Buying TIPS through mutual funds offer more flexibility.

There are several benefits of buying TIPS

1. TIPS are very advantageous for long-term investments.
2. TIPS are superb ways to diversity your portfolio which reduces whole portfolio risk.
3. TIPS are government guaranteed.
4. TIPS are less unstable than traditional bonds.
5. TIPS are helpful when inflation rates are projected to move up and when economy slows down.
6. Investment on TIPS requires less active investment management thus help both beginners and experienced investors.

Some investors object that TIPS hasn't done anything interesting in recent times. This is not correct. We've been in the influence of disinflationary forces, not inflationary ones. That will not change next week or next month.

But as the deficit continues increasing which makes people sad, pressure will increase on the government to do "something". That "something" could be a decision to inflate our way out of this mess, rather than risk the kind of deflationary spiral that Japan has suffered over the past 2 decades.

Understand that:
The Fed has by now taken interest rates nearly to zero.
Congress has by now tried a huge fiscal stimulus
The Federal Reserve has already created trillions out of thin air to mop up worthless securities.

There are chances of rise in inflation if the economy stumbles once more which forces to the government to take further action, it possibly will be even further reckless.

A few libertarians as well as laissez-faire capitalists will refuse to buy TIPS. However other inflation hedges sometimes never work. Hence there is no little risk taking an alternative approach.

In total, TIPS is the only investment that guarantees a return that exceeds inflation in the years ahead. And it is in fact an crucial element of your portfolio.

Hedging against inflation can be risky sometimes. Subscribe to the FREE Weekly Wealth Letter to learn strategies about Hedging against Inflation to reduce risk on your investment.

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