Why are TIPS bond prices so volatile, compared to other government bonds?

Question

It seems like they should be more stable, since they discount any inflation effects, but it's just the opposite. They were up more than 1% yesterday, and down more than 1% today, way more than short term bond prices.

Answer 1

With the effects of inflation "guaranteed" through principle adjustments, another way to think of TIPS Bonds in the short run is as an interest rate pure play. Doesn't sound as stable now, does it?

You should expect TIPS bonds to increase in volatility during periods of increasing uncertainty and changing interest rates.

Of course, the key for long term investors is "short term." Short term volatility is another name for "noise" and can safely be ignored by long term investors in TIPS Bonds.

Answer 2

You are comparing apples and oranges. Short term bonds have very little price volatility. Compare them to fixed rat T-Bonds of similar duration.

Answer 3

TIPS are esssentially a hedge against inflation. If inflation is high (or perceived to be rising), TIPS will generally do well. If inflation is low, their return will reflect that.