Bill Gross Says TIPS Are a Good Investment

Bill Gross of Pimco and many other anlaysts are saying that Treasury Inflated Protected Securities (TIPS) are very cheap and offer a good investment as the government's stimulus program begins to reawaken inflation.

Bill Gross of Pimco and many other anlaysts are saying that Treasury Inflated Protected Securities (TIPS) are very cheap and offer a good investment as the government's stimulus program begins to reawaken inflation.  TIPS are US Treasury bonds whose principle is adjusted for inflation.  If inflation is negative the princple will be adjusted down.  If positive it is adjusted up.  At the moment, TIPS are being priced at very low levels.

“They’re breathtakingly cheap,” said Mitchell Stapley in a Bloomberg article.  He oversees $22 billion as chief fixed-income officer for Grand Rapids, Michigan-based Fifth Third. “This one’s going to take a while to come to fruition but I’m buying them so dirt cheap I’m willing to have a little patience.”

TIPS are not only chearp because of deflation, but because hedge funds have been forced to dump them due to forced redemptions.

In the same article, Bill Gross was quotes as saying:

TIPS “can benefit if and when the government’s efforts to reflate begin to take hold,” Gross, head of Newport Beach, California-based Pimco’s $128.4 billion Total Return Fund, wrote in a note to clients on Jan. 8. While break-even rates suggest consumer prices will fall an average of 1 percent a year for 10 years, that’s “possible, but not likely,” Gross said.

Such a decline in inflation would mean that prices would fall by 10%+ over the next ten years.  That's a very grim outlook for the economy. 

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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Comments

  • JRodgers

    February 24, 2009

    Tips scare me because the underlying rate can be easily manipulated by Treasury. Plus, they are backwards looking. I'd certainly buy them before I'd buy Treasuries, but I'd probably just as well stay in cash.

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