Risks abound with inflation-linked bonds
These healthy rates were not a surprise, since economic theory predicted that real yields should approximate real gross domestic product growth, which averaged between 3 per cent and 4 per cent at that time.
During the dotcom bubble? A funny thing happened. Perhaps he did not get the news. It popped. I doubt very much that we will be going back to that fake high growth era, especially as more and more baby boomers begin to retire.
All this means that Tips investors should beware. Although Tips may compensate holders for future inflation, the interest rate that they offer is far too low to offset the risk of rising rates.
Risk abounds? If we buy the 30-Year TIPS and hold it until maturity then we will earn 2.08% over inflation. That's the current rate. No matter what rates do this is what we will earn going forward. As a retiree who values safety, I am completely fine with that. I'm locking it in. I'll be buying the 30-Year TIPS this month in the auction.
Another factor is slowing real economic growth: real GDP growth averaged over 3 per cent in the 1980s and 1990s but has fallen to about 2 per cent since 2000.
But these factors can scarcely explain the magnitude of the decline in real yields.
He didn't seem to have any problems with long-term TIPS paying a real yield of 3% to 4% when real GDP growth was 3% to 4%. In fact, that was the very math he used. So why is it so hard for him to understand that earning a real yield of 2% when real GDP growth has been 2% might not be such a bad thing?
I have a theory. Treasury Inflation Protected Securities tried to run over Jeremy Siegel's dog. What else could possibly explain his ongoing hatred of them? Well, other than the fact they've made him look like a fool for the past decade by outperforming his precious stocks.
It's just a theory of course.
Maybe Jeremy Siegel will someday figure out that retirees should actually value safety. I do. I can't afford to take big risks with my nest egg. I do not have a job to fall back on.
Is now really the time to embrace stock market risk? The S&P 500 has nearly doubled from its 2009 low.
October 8, 2008
Who Crippled Capitalism?
Jeremy Siegel, finance professor at the University of Pennsylvania´s Wharton School of Finance commented, “Two weeks ago was the first time in my life that I was worried about the very stability of the United States financial system.”
It's all biscuits and gravy now apparently. I'll pass.
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