TIPS Strips, Redux - Seeking Alpha

SeekingAlpha has an interesting "interview" with a Barclay's expert (Mike Pond) on Treasury Inflation Protected securities. It covers many topics (from deflation to why TIPS Strips never caught on. Two things for class perspective that my students should definitely be aware of is the relationship between reinvestment rate risk and duration and the impact of liquidity on returns (and why if you are a long term investor, you may want to hold an illiquid security).

TIPS Strips, Redux - Seeking Alpha:

"TIPS are what Pond calls 'very backended': Their coupon is low, relative to the principal amount, and it's the big final principal payment which provides a large chunk of their total yield. So the reinvestment risk on TIPS is already lower than it is on most bonds....[currently] real yields on TIPS are ridiculously high. You'd be better off buying TIPS all the way out to 8 or 9 years than you would be buying Treasury bonds, just so long as inflation is greater than zero. And the higher that inflation gets, of course, the better off you'll be in TIPS.

Do investors really believe that the US will see deflation over most of the coming decade? Probably not: .... TIPS are much less liquid than Treasuries, and therefore trade at a significantly higher yield, despite the fact that their credit risk is identical."