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TIPS Or Total Bond Index If Bond Market Crashes?
Old 02-05-2009, 07:49 AM   #1
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TIPS Or Total Bond Index If Bond Market Crashes?

Hi, some seers are forecasting a bond market crash due to the heavy influx into bonds and, so, I'm wondering if TIPS are a better way to go than a total bond index fund because at least with TIPS, your principal is protected. Would appreciate your thoughts. Thanks.

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Old 02-05-2009, 07:52 AM   #2
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I think it depends on the reason for the bond market (presumably you mean Treasuries here) plummeting.

It could be out of credit concerns. It could be because the stock market has turned and people are abandoning pitiful yields for stocks again. It could be because of interest rates and/or inflation. Each of these could impact segments of the credit markets differently.

"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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Old 02-05-2009, 12:10 PM   #3
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If rates go up and principal value goes down, then the shorter duration fund or bond will do better. If there is a flight to quality, all else being equal, the TIPS would tend to do better since the total bond mkt has a very significant amount of non-treasury corporate issues.

A flight away from quality (ie risk premium for corp issues shrinking) would suggest total bond market.

The answer is that it depends on what risks you are trying to avoid.
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