TIPS tips

Treasury Inflation-Protected Securities, or TIPS, had to pass through rough weather in last several weeks. A recent sell-off, on the back of plunging gold prices and a rather tame inflation report, has made them look like a stupid investment at this point of time.

However, things changed in somewhat positive direction after Bill Gross, chief investment officer at Pimco and manager of the Total Return Fund PTTAX, tweeted out his fondness for TIPS on April 19th:"Buying TIPS. Breakeven inflation at 2.35% for 10-30 yr TIPS. PIMCO expects higher. Foreign $ reserve countries need protection."

TIPS protect against inflation by giving holders a principal amount that increases alongside inflation. The spread between the yield on the safeguarded TIPS and the yield on plain vanilla Treasurys is known as the 'break-even rate'. This alerts holders to the rate of annual inflation necessary for the former to outperform the latter. Gross puts this rate at 2.35% for the longer duration bonds.

If you -- like Bill Gross -- believe inflation is bound to pick up, TIPS are attractive at this point of time. And right now, you can get them for a bargin. One way to buy is through an ETF, such as the iShares Barclays TIPS Bond Fund, TIP (low expense ratio of 0.20%).

Note: When TIPS increase in value due to inflation adjustment, Uncle Sam considers that to be a reportable income, even though money does not reach your hand before the bonds mature. So, TIPS would give you more profit if you hold it in your retirement account.