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Duration of TIPS

John Hollyer of Vanguard Answers: "What Are the Risks of Investing in TIPS?"


Duration -- A Risk of Investing in TIPS

There are three primary risks of investing in TIPS. The first risk of investing in TIPS is that they are long-duration assets, meaning that they’re generally a longer-term bond (the average life of the TIPS market is about 10 years). While TIPS are indexed to inflation, they do have relatively high price sensitivity to changes in real interest rates (as with any bond, prices and interest rates/yields move in opposite directions.)

So, while I characterize the yields of TIPS as being the long-term, risk-free rate, in the short term, their prices can fluctuate pretty substantially. For an investor who’s uncomfortable with price fluctuation, TIPS can be problematic. Their prices will move around.

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