Hulbert urges investors to lock in US Treasury inflation-protected securities as real yields surge
Mark Hulbert recommends constructing a TIPS ladder to secure inflation-adjusted returns, citing data from the Federal Reserve Bank of Cleveland and deep liquidity in inflation swap markets.
Financial analyst Mark Hulbert has advised investors to increase exposure to US Treasury inflation-protected securities (TIPS), arguing that current real interest rates present a significant opportunity that has been obscured by prevailing market narratives. Hulbert contends that the widely held belief that real rates have fallen to negative levels is based on a fundamental calculation error, specifically the use of trailing inflation rather than expected future inflation.
According to Hulbert, real interest rates are defined as the difference between nominal interest rates and expected future inflation, not past inflation. He notes that while the Federal Reserve sets the fed-funds rate, which is an extremely short-term rate, this does not accurately reflect longer-term rates with maturities of one year or more. When calculated using expected inflation, current real yields are positive and notably higher than historical norms.
Data referenced by Hulbert indicates that the 10-year real yield recently stood at 2.1%, which is 1.2 percentage points above its 10-year average of 0.9%. Similarly, the 1-year real yield is reported at 2.2%, sitting 1.9 percentage points higher than its 10-year average of 0.3%. These figures are derived from the inflation expectations model utilised by the Federal Reserve Bank of Cleveland, which incorporates Treasury yields, inflation data, inflation swaps, and survey-based measures.
Hulbert recommends that investors construct a TIPS ladder to lock in these inflation-adjusted returns. According to data from TipsLadder.com, a 30-year TIPS ladder currently offers a guaranteed inflation-adjusted withdrawal rate of 4.9% annualised over the next 30 years, with a real yield of 2.7% annualised. This represents a marked improvement from earlier in the decade, when the comparable withdrawal rate was just over 4.0%.
The analyst defends the robustness of the Cleveland Fed’s model against criticisms that it relies on projections rather than reality. He points to the depth of the global inflation swap market, which has a total notional value in the trillions of dollars, and the US TIPS market, estimated at $2 trillion. In these markets, traders price in inflation expectations to within a single basis point, suggesting that the collective wisdom of full-time traders provides a reliable forecast for sustained real yields.
