Executive Summary
If you buy TIPS and hold them to maturity, you will get a return in excess of inflation equal to the real yield at time of purchase. Although this return of 0.34% per annum at the end of February 2017 may be far from spectacular, it is perhaps still worth considering against the alternatives of cash and nominal bonds.
Further, given their surprising volatility, TIPS are particularly well placed for implementing a dynamic asset allocation battle plan using the real yield as a trigger point for buying and selling. Buying TIPS at a real yield that you would be content to hold until maturity removes any concerns about potential drawdowns but, if yields do fall, there can be significant scope to crystallize short-term gains.
However, if you plan on using TIPS as a store of dry powder, it is worth bearing in mind that (the normally pretty good) liquidity might desert you just when you want it most – TIPS should definitely not be your first, or only, source of dry powder.
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