TIPS = Treasury Inflation Protected Securities.
Inflation could come quickly if the U.S. starts printing money to pay debt. I'm thinking about investing in these to protect my portfolio.
How does the U.S. credit rating affect these securities?
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Interesting question, given that you'd be investing in the very entity that had its credit rating lowered. Sort of a recursive situation there.– JohnFx ♦Commented Jul 27, 2011 at 15:18
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I would say that you're the one to answer it - would you still consider investing on the same terms if the credit ratings are lowered? If so - then it doesn't affect it at all (assuming you're holding them and not reselling).– littleadvCommented Jul 27, 2011 at 19:12
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I'm not sure if purchasing government debt to hedge against the government printing money to pay said debt is a good strategy....even if it is indexed against inflation.– MuroCommented Jul 27, 2011 at 21:21
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lol starts? or Starts it again. We have already had QE1 and QE2. But being as the USD is backed only but the full faith and credit of the USG then lower credit means less valuable dollar. That devaluation not inflation it is not protected from that.– user4127Commented Jul 29, 2011 at 16:58
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1 Answer
Lowering of the US credit rating would affect all US bonds. Some institutional investments are required to invest in securities with a certain credit rating (i.e. money markets and some low risk mutual funds). If the credit rating is lowered these institutions would be required to dump their US bond holdings. This could have a serious affect on bond prices. The lower bond prices would drive up yields.
If the US credit rating was lowered after you purchased TIPS then the price you could sell your TIPS for would most probably be lower then what you bought them. You would lose money.
All US bonds, including TIPS, would be affected by a lower credit rating since the credit rating is suppose to indicate the borrower's ability to repay the debt. This is independent of inflation. TIPS provide no additional benefit over regular bonds in regard to credit rating.
