Bond market: TIPS ‘an alternative to consider’ amid inflation, analyst says

Yahoo Finance's Rachelle Affuko talks with PF Wealth Management Group President Frank Paré about alternatives to explore when it comes to bonds

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RACHELLE AKUFFO: If rising interest rates have thrown you for a loop, Treasury Inflation Protected Securities, a.k.a. TIPS, could be a safe bet to protect your cash. Joining now with tips for TIPS is PF Wealth Management Group president and managing partner Frank Paré as part of our Financing Your Future segment brought to you by Synchrony Bank Savings. Good to have you, Frank.

So break this down for us because a lot of people are wondering, should I just dive straight into bonds? But as you're mentioning here, there are some alternatives people should be exploring.

FRANK PARÉ: Absolutely, and thanks for having me, Rachelle.

TIPS are an alternative to consider. However, if individuals are looking for a short term-- sort of take advantage of inflation being relatively high, I wouldn't necessarily say go with TIPS. TIPS are, again, Treasury bonds that are backed by the full faith and credit of the US government, and they're meant for long-term investors.

And the best thing to kind of consider when you're looking at TIPS is whether or not you're buying them in a retirement account or a taxable account because even though TIPS pay out twice a year, what happens is the interest, or at least the returns, are accrued. So it's not as if you're going to get that check in your account. Instead, you're going to have it applied to the principal.

However, from a tax standpoint, you're going to be taxed on it as taxable income. So in terms of earnings from TIPS, the best way to invest in them is to do them through a retirement account.

RACHELLE AKUFFO: And so how have they fared since the Fed started raising rates? What sort of returns are we seeing?

FRANK PARÉ: Yeah so TIPS didn't do so well last year, in part because, again, yields were up. And as a result of yields being up and the TIPS prices going down because of the inverse relationship, they didn't do so well. However, again, this is for those individuals who were looking to make a quick profit as a result or trying to take advantage of inflation. Those were not exactly the best investments. If, on the other hand, you were-- you are a long-term investment, then TIPS are still a pretty good investment, and there are some opportunities.

The thing to keep in mind is when TIPS are out there trading in the secondary market and the prices are being adjusted to inflation, something to note is if you're buying them when the adjustments are high, well, now you're looking at what happens when inflation goes down? And that's when TIPS are adjusted downward.

So something to keep in mind is if you're looking at TIPS, don't think of them as a short-term hedge against inflation but more or less a long-term hedge against inflation. So yeah, they didn't do so well last year, but I wouldn't necessarily say there aren't opportunities now with respect to investing in TIPS and using them as part of your long-term strategy.

RACHELLE AKUFFO: And we've looked at TIPS in regards to retirement accounts. What about for nonretirement accounts and the I-bonds? What are you looking at there, and how should people be investing there?

FRANK PARÉ: Yeah, another great inflation-protection investment. However, the difference between TIPS and I-bonds are TIPS you can invest upwards of $10 million. With I-bonds, well, you're limited in terms of what you can purchase during the year. You're limited to $10,000 in terms of that investment. You can go as low as $25. And the maturities, of course, range. But again, you're getting an opportunity to take advantage of inflation. In other words, you're buying these I-bonds with a long-term view that, over time, you're going to beat inflation.

The good thing about I-bonds is the fact that the interest-- you can decide whether or not to pay the taxes on the interest annually or at the time of maturity. And I should add, just like with all Treasurys, you're not taxed in terms of-- the tax on those bonds are not taxed at state and local taxes. So you get a break there if you're living in a state like I do here in California.

RACHELLE AKUFFO: And so then who isn't this a good fit for? I know because we've talked about some of this being a longer-term investment here, who is this sort of investment not a good fit for?

FRANK PARÉ: Yeah, great question. Again, these are not the best investments for individuals who are looking to park their money for a short term. In other words, if they're looking to park their money for less than a year, neither of these are great investments. In fact, with I-bonds you must hold on to them for at least a year. And if you were to redeem them within five years, you're going to lose out on three months of interest. So for the short-term investor who is looking to park their money, these are not good investments.

RACHELLE AKUFFO: And certainly everyone make sure they do their homework. Frank Paré there, PF Wealth Management Group president and managing partner. Thank you for your time this morning.