Note: This is just one in a series of articles talking about my top picks for 2020. I encourage you to check out my other top picks under the "Trade Ideas" tab and look for the "Top ETF Picks For 2020" heading!
This is a pure play on rising inflation. Plain and simple.
TIPS returned around 8-9% in 2019, but it had nothing to do with inflation. It was the fact that they were Treasuries first and foremost that drove those gains.
TIPS had spent the two and a half years prior to 2019 moving sideways before rallying last year. TIPS trailed the broader Treasury bond market for much of the year until the 4th quarter when inflation risk started getting priced into the market.
While the Fed would have you believe that there's no inflation, the core inflation rate is 2.3%, above the Fed's 2% target, and it's been there for almost two years.
With the Fed's intention of letting inflation run above its target while flooding the market with billions of dollars of cheap money and consumer spending still strong, the prospect of higher inflation seems almost inevitable.
I like TIPS in 2020 because they potentially offer the best of both worlds. If the economy shows signs of slowing, investors will likely begin taking risk off the table, which would be bullish for Treasuries. In that case, TIPS participate in the risk-off rally.
If the economy shows signs of recovery but inflation starts rising, TIPS, whose prices are regularly adjusted according to the latest inflation rate, likely outperform the broader Treasury market.
If you’re looking to position your portfolio defensively in 2020, TIPS, in my opinion, represents the best option from the Treasury market.
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