United States government securities are a direct or debt obligation of the U.S government, issued by agencies of the U.S. government.
These types of securities have the full backing of credit and faith of the U.S. government and are seen as low risk, conservative investments for this reason.
For this discussion, I would like to focus on the looming rumors of inflation and where we may be able to capitalize on the opportunities, should it arise.
TIPS are just one example that can be used as an inflation hedge. So what are TIPS? TIPS are government securities whose face amount or principal value is based on the Consumer Price Index, or CPI.
Some key facts about TIPS are:
• TIPS are issued in terms of 5, 10 and 30 years.
• The interest rate on TIPS is determined at auction.
• TIPS are sold in increments of $100. The minimum purchase is $100.
• TIPS are issued in electronic form.
• You can hold TIPS until they mature or sell them in the secondary market before it matures.
• In a single auction, an investor can buy up to $5 million in TIPS by non-competitive bidding or up to 35% of the initial offering amount by competitive bidding.
How does it work?
• Assume you buy a 10 year TIPS with a face amount of $1000.00
• You have an annual interest payment, or coupon, paying you 3% semi annually.
• This would be $30.00 a year paid at $15.00 every 6 months.
• A year later, the face amount adjusted +1%, based on the increase of the CPI.
• Now the face amount is $1010.00
• The 3% coupon remains a fixed rate.
• Your annual payment is now $30.30, paid $15.15 every 6 months.
But the possibility of deflation can also be a form of risk. Deflation occurs when the goods produced are exceeding demand, leading to a drop in price.
• If your principal dropped from $1000.00 To $900.00
• Your new interest payment would be $27.00 paid semi annually based on the 3%.
On the flip side, at maturity your TIPS would pay either your original $1000.00 or the adjusted principal, which ever is greater. This provision protects you against deflation.
A well diversified portfolio can help to minimize risk and capitalize on opportunities.
Securities offered through WFP Securities Corporation, divisions: WFP Securities and Western Financial Advisors. 6020 Cornerstone Court West, Suite 240, San Diego, CA 92121 • 858-677-0377 Member FINRA/SIPC
Check out this website for more information about TIPS.
Randy Rodriguez is a 10-year veteran of the investment industry, currently employed with Western Financial Advisors. His investment philosophy is based on minimizing risk while capitalizing on growth. A strong believer in community involvement, he is also the chairman of San Diego’s Hispanic Chamber of Commerce. To learn more about TIPS or if you have a question about your portfolio, contact Randy at Randy.Rodriguez@wfpsecurities.com or (858) 875-5837.