TIPS Or Total Bond Index If Bond Market Crashes?


Dryer sheet aficionado
May 8, 2008
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.
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.
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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