Is a pure TIPS strategy truly risk free?
A Treasury Inflation‐Protected Security (TIPS) is virtually risk free. As an obligation of the U.S. Treasury, it is mostly free of default risk. As an inflation‐indexed security held to maturity, it is risk free in terms of purchasing power. However, investing in a TIPS‐only portfolio for retirement is not risk free. This paper presents the results of a simulation analysis designed to evaluate the performance of a portfolio of inflation‐indexed Treasury coupon bonds. This study demonstrates that significant shortfall risk exists for TIPS‐only portfolios across a range of savings plans and the securities selection rules.
Haensly, P.J. (2016), Is a pure TIPS strategy truly risk free?. Review of Financial Economics, 28: 1-20. https://doi.org/10.1016/j.rfe.2015.09.003