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| Risk & Reward |
Inflated Optimism
Desmond Macrae
02/02/2004
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Alan Greenspan has tried to lull the financial markets with assurances that inflation will remain tame for years to come, but few professional investors have been pacified by the Fed chairman’s calming words. Indeed, the demand for securities that provide protection against inflation, like U.S. Treasury Inflation-Protected Securities (TIPS) that increase in value in line with inflation, is skyrocketing. In the past seven years, the government has issued more than $176 billion of TIPS, which now account for more than 5 percent of all Treasury bonds and notes.
 Globally, nearly half a trillion dollars in inflation-linked bonds now circulate. Much
of this is in Europe, where memories of
the devastating effects of recurring bouts of hyperinflation in the 20th century still linger, and where individual investors and professional asset managers alike have bought billions of dollars worth of inflation-protected investment products in recent years.
Some financial advisors now suggest that we follow suit. With the U.S. economy gaining steam, interest rates at all-time lows, the dollar falling and commodity prices rising, most economists and bankers expect inflation to make an unwelcome reappearance. Private bankers, investment advisors and asset managers suggest we allocate part of our portfolios to products that protect against inflation, such as TIPS, bespoke derivatives-based investments or commodities such as gold.
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