TIPS Rates Rising Fast

"By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens."

- John Maynard Keynes

I am going to buy TIPS at these levels. (TIPS = Treasury Inflation Protected Securities) My general rule of thumb is that when TIPS real rates are over 2.5%, they are of interest to me. (Pun intended.) TIPS have not been above 2.5% on a sustained basis for a long time, but they've really smashed through that level in the last several days and are now sitting at about 2.7%.

The historical record over the last century is that over time Treasury bills return less than 1% over inflation, and even long term Treasury bonds return less than 3% over inflation. (In some studies, long term Treasury bonds return closer to 2% over inflation.) Thus, a rate of 2.7% plus inflation seems quite good to me.

Many investors and academics consider TIPS to be a separate asset class. I concur with this view, although not merely based upon the empirical fact that TIPS have low correlation with many other asset classes. I believe you can decompose TIPS into two parts: a standard coupon bond plus what is essentially a forward contract on the consumer price index (CPI). One doesn't often find a security directly linked to a macroeconomic number like the CPI, so I agree that TIPS are a different animal than other assets.

You can find general quotes for TIPS rates here: http://www.bloomberg.com/markets/rates/index.html