7 Factors Affecting TIPS Bond Performance
1. The Expected Future Inflation Rate - The performance of TIPS bonds are affected by the expected inflation rate for the future. These securities are inflation protected securities, and if the expected inflation rate for the near future is expected to rise then these bonds will perform better. If inflation is expected to fall in the near future then the bond performance can suffer as well. If inflation is expected to increase then the demand for these securities can also increase significantly.
2. The US Economy - The economy of the United States can affect the performance of Treasury Inflation Protected Securities. A weak economy usually means a lower inflation rate, and this in turn causes the performance of these Treasury securities to decrease as well. A strong economy often means rising inflation, and this translates into better performance for this type of bond investment. The state of the US economy has a big impact on the performance of TIPS investments.
3. Changes in the Consumer Price Index for Urban Consumers - The Consumer Price Index is one factor that will help determine the TIPS bonds performance. When this index increases then the performance of these securities also improves because these bond rates are fixed to the CPI. The link between Treasury Inflation Protection Securities and the CPI means that the CPI is essential for this bond performance. Any changes in the CPI will affect the bond performance as well.
4. The Current Inflation Rate - When the current inflation rate increases then the bond performance for TIPS will improve automatically. Because these bonds are inflation protected then the return on this investment is better when inflation increases. Any changes in the current inflation rate will affect the way that these bonds perform.
5. Deflation - Deflation can destroy the performance experienced by TIPS bonds. These bonds are designed to perform better in times of high inflation, so deflation adversely affects the bond performance and can be a cause for concern with investors who hold these securities. Historically times of deflation are also the periods where Treasury Inflation Protected Securities perform the worst.
6. The Global Economic Situation - The global economy can play a role in the performance of Treasury Inflation Protected Securities, because this economy helps to determine supply and demand. When the economy around the world is strong then foreign investors are more likely to invest in TIPS. If the global economy is weak many investors may choose to hold their capital, so there is less demand for these bonds on a global scale due to lower inflation rates.
7. Decisions Made by the Federal Government Concerning Monetary Policy - The TIPS bonds performance is dependent on the decisions that the Federal Government makes on national monetary policy. If the Feds change the policy in place, this can affect the bond performance in a number of ways. The government may adjust the inflation rate higher or lower depending on the economic conditions and other relevant factors. These changes can cause TIP securities to perform better or worse, depending on the specific changes made to the policies in place.
