Rates for 10- and 30-year TIPS recently hit a 15-year high. What are TIPS? More importantly, what sort of conditions have led to these investment vehicles hitting a 15-year high? Let’s jump in!
The United States Federal Reserve and other central banks in the developed world responded aggressively to the surging inflation rates that came after the COVID-19 pandemic. Indeed, the U.S. Fed and the Bank of Canada (BoC) both enacted the most stringent interest rate tightening cycle since the early 2000s. The increase in interest rates has greatly increased pressure on a North American citizenry that was already overleveraged after more than a decade of historically low interest rates and cheap credit.
A Treasury inflation-protected security (TIPS) is a security whose principal is tied to the Consumer Price Index (CPI). The principal is designed to increase with inflation and decrease in the event of deflation. In September 2023, inflation in the United States came in at 3.7%. The U.S. Federal Reserve has set its inflation target at 2%. That means that Americans will have to stomach high interest rates for at least the next few months.
The 30-year TIPS rate hit its highest level since December 2008, in the thick of the worst financial crisis since the Great Depression. Typically, TIPS reflect market views on government borrowing and the state of the economy and inflation. However, that these vehicles have hit levels not seen since the 2007-2008 should keep investors hyper aware in these tumultuous times.
