Magazine article Risk Management

Inflation Insurance

Magazine article Risk Management

Inflation Insurance

Article excerpt

There is one problem with the U.S. Treasury's inflation-protection securities, known as TIPS on Wall Street: nobody wants to buy them. TIPS provide investors with insurance against runaway inflation--but because of the close tabs that Alan Greenspan and the Fed keep on inflation, no one seems interested.

In almost any economic climate, inflation insurance is a hard sell. Buyers have been especially scarce as TIPS have been auctioned off over the past four years. Some TIPS have been priced so low that inflation of more than 1 percent would actually end up costing the government money. With inflation having risen to 3.3 percent since the beginning of the year, the government has paid an extra $1.5 billion in interest compared with ordinary treasury bond issues.

But these losses are gains for investors, gains that have come even though inflation has not gotten out of control. And these investors' gains--and the government's losses--will skyrocket if inflation accelerates.

That is why the advisory committees on Wall Street are encouraging the U.S. …

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