TIPS Selling Well While Bank Rates Stay Low
May 10, 2010
Money-Rates.com readers are living through an exciting time for bank rates. Although remain quite low, news headlines are flying around about higher interest rates on the way.
One tidbit of bank rate news that may interest investors this week was the release from the Treasury Department showing strong demand for Treasury Inflation Protected Securities, or TIPS. According to the Associated Press, the March TIPS auction saw much higher demand than the January or February auctions.
How TIPS Can Protect Investors from Inflation
More TIPS sales indicate there are a lot of investors out there who are worried about inflation, despite protestations from the elite financial analyst class that inflation is not a problem.
Investors can read up about TIPS at TreasuryDirect.gov. The short version is this: TIPS are bonds that, if the Consumer Price Index goes up, the interest rate paid on the bond goes up. Furthermore, at the maturity date of the bond, if the CPI has gone up, so has the value of the TIPS bond.
In this way, these bonds offer some degree of protection from future price increases (inflation).
TIPS and Bank Rates Compete for Investors' Low Risk Dollars
News that TIPS are selling like hotcakes has the potential to impact, for example, savings account interest rates simply because banks that offer savings accounts are competing with the U.S. Treasury's TIPS product for much of the same market demographic: people with money who don't want to lose money.
Higher demand for TIPS, then, could eventually be one factor among many that causes banks to raise interest rates on savings accounts and other low risk bank deposit accounts, so as to attract more customers.
