The problem is that 10-year TIPS yields were recently more than 2.5 percentage points below 10-year Treasuries. That means inflation would have to rise higher than 2.5 percent to make a TIPS bond outperform a Treasury.
"TIPS are a segment to pay attention to, but right now, we wouldn't fully recommend them," Larkins says.
One important issue for bond investors is whether to purchase individual bonds or a bond fund. The advantage of individual bonds is that if prices fall, you can simply wait for the bond to mature and generally receive the principal back.
Bond funds don't mature, so if prices fall, the only way you'll recoup your principal losses is if prices rebound. But funds offer diversity. And experts say you need at least $100,000 to $300,000 to create your own diversified bond portfolio without paying excessive commissions, unless you're just buying Treasuries directly from the government.
CDs, savings accounts, stocks
As for CDs, they represent a viable alternative to Treasuries, experts say. "Some two-year CDs offer a 1.49 percent rate, and you can re-adjust the rate once before maturity," says Ryan Leggio, an analyst for Morningstar in Chicago. That's higher than the recent 1.12 percent rate on three-year Treasuries.
"You can create a CD ladder and change interest rates whenever you want," even if it's only once per CD, he says. And CDs are insured by the Federal Deposit Insurance Corp., of course.
Savings accounts are an attractive FDIC-insured option, too, Leggio says. Some savings accounts have better rates than short-term Treasuries do. And if interest rates rise, Treasury prices will fall, while savings account rates will likely increase.
Given the low yield of the safest fixed-income investments, Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, N.Y., recommends considering blue-chip stocks with high dividends. Some of the country's largest utilities recently offered yields above 5 percent, for example.
Of course, stocks have more principal risk and volatility than the safest fixed-income investments. But blue-chip dividend stocks are among the least risky. "We think that's a great alternative," Ghriskey says.
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