Consumer prices are cooling, but BlackRock bets on inflation-protected bonds for the long term. Here's why

Published Mon, Jan 8 20242:18 PM ESTUpdated Mon, Jan 8 20243:32 PM EST

Inflation-protected bonds may be the last thing on investors' minds amid cooling prices, but BlackRock is betting on the securities for the longer term. Treasury inflation-protected securities, known as TIPS, saw a record $33 billion in redemptions last year, as of the week ending Dec. 20, according to Bank of America Securities. The principal portion of the securities rises and falls alongside the movement in the consumer price index. At maturity, you get the greater of the inflation-adjusted price or the original principal. In November, the consumer price index increased 0.1% month over month and 3.1% year over year , according to data released by the U.S. Bureau of Labor Statistics last month. December's CPI figures are set to be released Thursday. Inflation peaked in June 2022 at 9.1% on a 12-month basis. BlackRock still thinks inflation will fall this year, but eventually sees it staying closer to 3% in the new post-pandemic regime — above the Federal Reserve 's target of 2%. Due to that, BlackRock named inflation-protected securities one of its top 2024 strategic calls for those with a time horizon of five to 10 years. "Over the longer term, there are structural constraints, [which] could be labor constraints," said Wei Li, BlackRock's global chief investment strategist. In fact, the most recent jobs numbers make it even more apparent that there is a labor shortage, she added. U.S. employers added 216,000 positions in December , much more than economists had expected. "We see inflation going through a roller coaster over a longer term," Li said. "It gets close to 2% in 2024, but it then goes back up. And in fact, we see inflation rise close to 3% and slightly above 3% over the next five years." US5YTIPS 5Y mountain 5-year TIPS performance over 5 years BlackRock is also more granular — or well diversified — in its portfolio construction post-pandemic. "Inflation-linked bonds is how we're thinking about being granular in the duration bucket of your portfolio construction," Li said. The correlation between equities and bonds has become more positive but has also swung wildly, she added. "When that is the case, you cannot rely on the traditional correlation and diversification to construct portfolios," Li said. "We've got to be one layer below, which is how we're thinking about breaking down the old duration basket into nominal bonds, into inflation-linked bonds, into different parts of the curve, as we think about portfolio construction in this new vision." Buying TIPS Investors can buy TIPS in five-year , 10-year and 30-year terms through the TreasuryDirect website . There is a minimum purchase of $100 and interest is paid every six months until maturity. Investors are responsible for federal income taxes on interest payment, as well as taxes on growth in principal the year it occurs. Therefore, experts recommend holding these instruments in tax-deferred accounts. Investors can also get exposure through bond exchange-traded funds, which provide liquidity and diversification. However, they don't mature the way the individual issues do. BlackRock, which has a traditional TIPS ETF, also recently launched a suite of defined maturity TIPS ETFs last fall. Unlike traditional ETFs, defined maturity ETFs have maturities and liquidate like a bond. BlackRock's 10 iBond offerings have maturities running from 2024 to 2033, with each ETF holding TIPS maturing between Jan. 1 and Oct. 15 of its given year.