Bridge over ocean
1 September 1999 Financial Analysts Journal Volume 55, Issue 5

Assigning a Duration to Inflation-Protected Bonds

  1. Ivan Rudolph-Shabinsky
  2. Francis H. Trainer

In evaluating U.S. Treasury inflation-protected securities (TIPS) for fixed-income portfolios, managers frequently use the TIPS' effective durations, which are much shorter than modified durations. Unfortunately, when the manager's intention is to profit from a decrease in real rates or an increase in the market's implied inflation forecast, the use of effective durations will thwart obtaining the objective. We discuss this unfortunate effect and recommend alternative duration strategies when TIPS are to be used in an actively managed portfolio with a nominal benchmark.

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