The Most Expensive Bond
The Treasury inflation-protected securities (TIPS) market has been performing well recently. That's the good news. The bad news is that the rally in TIPS has been entirely unjustified, to the point where I'm ready to call them the most overvalued bonds in the market today.
For those who don't know, TIPS are Treasury bonds that are designed to protect investors against inflation. The principal value of a TIPS bond increases in line with the consumer price index (CPI) over the life of the bond. So if you originally buy $10,000 of a TIPS with 10-years to maturity, and between now and maturity, the CPI rises by 40%, at the end, you'd get $14,000 in principal. Your coupons would also be calculated based on the adjusted principal. So, if you had a 1% coupon, you'd start by getting $100 a year in coupon payments, but by the end, you'd be getting $140 a year....568 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.
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