TIPS Still a Good Inflation Hedge for Some Investors: Schwab Panel

“With yields so low, however, we do see a risk in yields moving modestly higher into 2022, which may limit the total return potential for TIPS investments,” Schwab says. Because of that, the firm said it stopped short of calling TIPS a good inflation hedge, especially over the short run. “Over the long run, however, TIPS are one of the most straightforward ways to protect against inflation,” it says.

Asked what would get him back to supporting TIPS as an investment strategy this year, Contopoulos said: “For me, it would be that the Fed went back to transitory language that seemed as though, for whatever reason … the 10-year [Treasury] wasn’t going to go higher… and it was suggested that the 10-year had topped out but that you’re entering into some sort of stagflationary environment where growth remained relatively low.”

Along with that, if “inflation remained elevated, that would be a really good reason to buy TIPS,” he added.

But “I don’t think we’re close to stagflation personally. Yet,” Contopoulos said with a laugh, conceding: “We could be. We’ve got to keep an eye on it and track the data but I don’t think we’re there. But that would be the scenario.”

A ‘Tremendous Opportunity’

Meanwhile, “there’s tremendous opportunity, I think, in inflationary assets because … I think we’re sort of at the beginning of a paradigm shift — one that likely yields, over the long term, higher inflation,” according to Contopoulos.

“You may get some quirky inflation numbers that [include] negative inflation. We get disinflation,” he said. But he predicted that, on a medium- to long-term basis, “we think you’re in a higher inflationary environment where there’s tremendous opportunity, particularly [on] the resources side, and you can get that exposure through very easy traditional asset classes like U.S. energy.”

Or through commodity-exposed countries like Australia, Canada and the U.K., he added, calling that a “very overlooked area of the market.”

Baby Boomers

There may, meanwhile, be a challenge ahead for baby boomers in particular, according to Tierney. “We look at the demographics of the baby boomers — they’re the largest constituent of investors still — and if we look at their average portfolios, they’re hugely overweight in equities,” he said.

This is “a generation that got very comfortable with equities because it’s done well for their whole investing lives but they’re really putting themselves at risk for what should be a 30- to 40-, 30- to 35-year retirement,” he warned. “They’ve got too much equity exposure and they’re vulnerable to long periods of drawdowns.”

He added: “If you remember nothing else from this session … we do have three and a half, four and a half percent bonds out there now. And so it’s not a bad time to reengage with your clients and talk about fixed income.”

And, when you do that, he suggested discussing TIPS with them, noting “there’s really easy ways to get TIPS exposure.”

(Pictured: D.J. Tierney, senior client portfolio strategist at Schwab Asset Management; Photo by Jeff Berman)