Lock in attractive real yields with this inflation-protected investment, says UBS
Investors can lock in some juicy real yields with Treasury inflation-protected securities, according to UBS. After upgrading 5-year TIPS in August to most preferred and seeing them outperform 5-year nominal Treasurys this year, the bank now recommends moving out the curve to the 7-year to 10-year areas . With TIPS, the principal portion rises and falls alongside the movement in the consumer price index for all urban consumers. At maturity, you get the greater of the increased inflation-adjusted price or the original principal. U.S. 10-year TIPS are currently yielding about 2.22%. In January, those yields hovered between 1.7% and 1.8%. Bond yields move inversely to prices — as yields rise, prices fall. US10YTIP YTD mountain U.S. 10-year TIPS year to date “While stronger economic data has drastically impacted short-end inflation expectations, the longer end has remained anchored, despite shifting sentiments,” Leslie Falconio, head of taxable fixed income strategy in UBS Americas’ chief investment office, said in a note Friday. “The result has been rising real yields further out the curve, offering the opportunity to lock in attractive real yields ahead of expected falling nominal yields later this year,” she added. Treasury yields are expected to decline when the Federal Reserve starts reducing the fed funds rate. Investors earlier this year had anticipated multiple rate cuts in 2024, but those expectations have since changed. They now only expect one rate cut by the end of 2024 , according to the CME FedWatch Tool . Fed officials have repeatedly said they don’t expect to decrease rates until inflation nears the central bank’s 2% goal. Inflation expectations are one driver of TIPS’ performance, but so are nominal interest rates, according to Falconio. Nominal yields have been rising as the market reassesses those interest rate expectations. “Our expectation of declining nominal yields in the second half of the year will be a tailwind to performance,” she said. “We believe earning this inflation-adjusted income stream will prove attractive over the next several months.” TIPS aren’t the only inflation-protected security available to fixed-income investors. Series I bonds have a variable component to their interest rate, and it’s based on inflation. On Tuesday, the Treasury Department announced that Series I bonds will pay 4.28% annual interest from May 1 through October 2024, down from the 5.27% annual rate offered since November.
Source link
