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D40 wrote:
No, the term DEFLATIONARY was not a typo. My point was that TIPS are required to pay at least face value at maturity, as I understand it, so if you hold till maturity there is no risk of getting less principal back due to DEFLATION.

I tend to agree with you that inflation is probably NOT right around the corner, and rates could stay this low for a long time. But it just seems that at least a portion of long term fixed income fund would be best positioned in this environment in TIPS.


I was hoping that it was a typo. That it's not means you don't understand the concept. In fact, you are looking at it backwards.

If you are to receive $100 in the future in a DEFLATIONARY economy, that future $100 will buy MORE goods and services in the future (future prices of goods and services will have gone DOWN). The value of your $100 will have gone UP.

If you are to receive $100 in the future in a INFLATIONARY economy, that future $100 will buy LESS goods and services (future prices of goods and services will have gone UP). The value of your $100 will have gone DOWN.

If you are to receive $100 in the FUTURE and interest rates go UP, the PRESENT value of that future $100 will go DOWN.

If you are to receive $100 in the FUTURE and interest rates go DOWN, the PRESENT value of that future $100 will go UP.

The longer the term of maturity of that $100, the more sensitive its PRESENT value is to changes in interest rates.

Do you get it?
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