Everyone asks for tips: Where can I put my money? Stocks or bonds have done very badly over the last year, needless to say, and one cannot be confident that they have hit bottom. Should one just leave everything in banks and money market funds? Surely there must be something else worth buying?
2 Responses to “TIPS tips”
Prof. Frankel, TIPS may indeed be mispriced and a reasonable investment. However, I’d appreciate your thoughts on the following: (1) Whenever I hear the comparison with bank CDs and money market funds, I get nervous. A 10 or 20-year TIP has the same exposure to interest rate risk as a 10 or 20-year T-note. There is an assumption that inflation rates and treasury rates will move in tandem. However, it is easy to imagine that interest rates can become decoupled from inflation. If the demand for long term treasury notes is reduced because of high treasury issuance, treasury interest rates could rise dramatically even in the face of deflation, causing TIPS to be hit with a double whammy.
“Perhaps the Fed should buy TIPs, alongside all the other assets it is buying”wouldn’t that mean that the fed explicitly acknowledges it intends to default on its price stability mandate?