The TIPS market--Treasury Inflation-Protected Securities -- experienced a first in 2010: yields went negative. Unless you're a financial advisor, you probably missed the news, so here's what it means: investors showed faith that the Fed would prevent deflation. They accepted a negative 5-year yield (today) for the expectation that there will be moderate inflation ahead (and thus create a positive return for the bonds).
That sounds like good news for the economy. But noted strategist Rob Arnott of Research Affiliates recommends buying protection in the event inflation is not moderate -- if it instead comes in severe bursts. Long-dated TIPS -- 30-year and 40-year bonds--offer yields of 1.5% and 1.7%. It's a puny yield, Arnott admits, but it might just be the insurance investors need if the years ahead are characterized by low interest rates and bouts of inflation.
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