This week, I’m talking about 5 types of bonds to own now. 

Today, I’m talking about a type of bond that has been irrelevant for the last decade, but could become the best bond investment decision you make if we have higher inflation in the future. And if you listened to last week’s podcast episodes, you know what I think. In short, I think higher inflation is coming. 

When inflation goes higher, the income you’re getting from your bond is fixed, so that bond income you’re getting buys you less and less as inflation goes higher and higher. And that’s why bonds aren’t great investments in an inflationary environment. Bond prices also drop when there’s high inflation, making your bond’s value lower as well. 

So what is a bond investor to do - well first of all, stay away from long-term bonds when inflation and interest rates are going higher, because the bonds that don’t mature for 10, 20, or 30 years are the ones that get creamed when interest rates and inflation are heading higher. 

But you don’t have to abandon bonds altogether when higher inflation arrives because you can own TIPS. TIPS stands for Treasury inflation-protected securities. These are bonds issued by the US govt and are indexed to inflation. 

When you own TIPS bonds, the price of the bond adjusts for inflation. So if inflation is going up, the price on your TIPS bond is also going up as well. The income payments you receive also adjust with every payment based on inflation, so you benefit from both a higher value on TIPS bond and higher income while you own the bond. 

Owning TIPS isn’t very compelling when inflation is low, since the interest rate you earn will be lower than comparable bonds, but if and when inflation returns in a meaningful way, TIPS can be a bond investor’s best friend. 

That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip.

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