Bill Irving, manager of the Fidelity Inflation-Protected Bond Fund, says TIPS were a better buy a year ago but still have their place in a diversified portfolio.
"One year ago we were very bullish on TIPS, particularly compared to regular Treasurys because of the fact that they were pricing in virtually no inflation over the next decade," he said. Now, TIPS are pricing in 2.25% inflation, which seems "much less likely," he said.
While most economists expect heavy government spending and other factors to produce inflation eventually, Irving noted that there still are deflationary forces, particularly an unemployment rate lingering near 10%. On the other hand, the Federal Reserve could spark inflation when it begins to remove excess reserves and end a highly accommodative monetary policy, he said.
TIPS have a role in a diversified portfolio as shelter against that risk, Irving said. "But one needs to understand that there's the possibility of a lot of price volatility along he way," he said.
U.S. Federal Reserve Chairman Ben Bernanke said Wednesday that the Fed could "before long" increase the spread, or difference, between the discount rate it charges banks for emergency loans and the federal-funds rate at which banks lend to each other overnight. But the Fed still expects short-term interest rates to remain at a record low for an "extended period" due to a soft recovery, he said. The economy still needs record low interest rates for now due to high unemployment and low inflation, the Fed chief said.
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