Is Investing in Inflation Bonds a Fashion Symbol Now?

US savings bonds have been a safe haven for investor’s money in the past. Months ago, people accepted negative to zero rates for safety. Financial Armageddon was threatening. Collapse of our entire financial system was a real threat. Now the economy, many seem to feel, is improving. This may be a hopeful but mistaken expectation however. TARP, TALF and all the other acronyms and stimuli are having an effect. The printing presses issue more dollars and the debt increases exponentially. And health insurance for all isn’t included yet in the debt picture. No wonder investors are worried.

In the same vein, it was just months ago that deflation was the ogre. Perhaps the investing public thinks he has been slain. Commodity prices are up again. Inflation is now the bad boy in town. Indeed, we see some sign of him in the new savings rate that banks are offering to try to attract capital. Your capital, that is. Really high rates are making a comeback–2% plus, that is. Well for those who have made zero this is great. Look at your statements from the money market accounts of the major investment houses like Schwab or Vanguard etc. Close to zilch on your ten to twenty five grand accounts. The banks are looking for new money and are willing to pay a premium price to get it. The new rates offered for savers now beats inflation or may equal it over the near future. Plus you have safety. These bank savings accounts are insured up to 250 K by your neighbors—the US taxpayer. To have gotten any kind of a return you needed to take a risk. Stocks, corporate bonds and other high yield junk bonds were the places money was being stashed. So if 2% is a good deal for you, look around. It’s there.

Maybe you want more safety and protections in an inflation economy. Inflation bonds are now fashionable again. Copeland and Zeng (THE WALL STREET JOURNAL, June 3) summarize the new scenario we are seeing. Uncle offers us the TIPS bonds. Inflation protected Treasury bonds are selling again like hotcakes. A few months back, it was dead as a doornail. But inflation is coming, so people want protection. The difference between a TIPS bond and the 10 year note is 2% now. This is the degree of inflation we can expect. A year ago, the difference was zero.

The stimulus, budget deficits, threat of protectionism in the White House and Congress, and continued regulations of business and banking that will fuel inflation. Investors want a safe haven again, only this time not to avoid Armageddon but stave off inflation.