Tip of the Week: Investing TIPS (03/27/00)

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	Investing TIPS Financial Tip of the Week by Deloitte & Touche OnLine March 27, 2000

Is there a place for Treasury Inflation Protected Securities?

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The U.S. Treasury Department began selling inflation-protected bonds in 1997. The lack of history, though, made it difficult to determine whether investors needed to own them.

A new study by Ibbotson Associates begins to answer that question. The investment analysis firm created a model for adding Treasury Inflation Protected Securities -- also called TIPS -- to a portfolio.

Because TIP are inflation indexed, "investors frequently underestimate their yield,'' the company said. For instance bonds today yield about 6.6 percent, but TIPS yield 4.3 percent. Factor in a rate of inflation of 2.5 percent, however, and the real yield of long-term bonds falls below 4.1 percent, making the TIPS a better deal.

The Ibbotson study found that a portfolio with TIPS had a higher yield with less risk that one without. "TIPS possess unique characteristics that are not available directly through any other investment vehicles,'' said senior consultant Peng Chen. "They should be considered when constructing a long-term asset allocation policy."