Treasury Inflation-Protected Securities

• Headline inflation rose 0.1% in July, missing the consensus forecast of 0.2% and continuing a trend of downside misses.
• Non-seasonally adjusted CPI-U declined 0.07% in July, which will lower principal balances for TIPS in August and tamper the November 1 variable rate for the I Bond.
• CPI-W, which is used to set Social Security benefits, also fell in July, which makes the Social Security Administration’s projection of a 2.2% benefits increase look faulty.

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In addition, I have updated my Inflation and I Bonds page with these new numbers.

And here are the new TIPS inflation indexes for September.

• The idea: Push inflation-protected money into the future, when you will need it in retirement.
• Both I Bonds and TIPS are super safe investments that can be purchased with zero commissions and fees.
• The only risk in purchasing ‘inflation protection’ is that you will receive a slightly lower return than with nominal investments. The cost is very low.

After getting together with friends from my college days, I suddenly had a moment when I realized that most people – maybe 95% of Americans – have no idea what inflation-protected investments are or how they could fit into a portfolio.

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• News media widely reported that a 2.2% increase in Social Security benefits is likely in January 2018.
• How is the COLA determined and how could anyone project it in early July?
• We need three months of data – inflation for July, August and September – to know the answer.

My wife and I were on vacation last week, eating breakfast at an Interstate hotel in southern Wisconsin. She read me a line from a USA Today story: “Social Security benefits projected to rise 2.2% in 2018.”

“What?” I nearly spit out my artificially-processed scrambled eggs. “How can that be? Inflation is running at 1.6% and we’re only halfway into the year. Wouldn’t this number come out in October or December? How can it be 2.2%?”

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• The coupon rate was set at 0.375%, so buyers got this TIPS at a discount.
• The inflation breakeven rate came in at 1.76%, which is attractive.
• Market reaction to the auction is trending negative, with yields rising and the TIP ETF falling after the auction’s close.

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• The break-even rate details investors’ inflation expectations. It is not a predictor of future inflation.
• The trend since 1997 seems to indicate that investors underestimate future inflation. But TIPS have underperformed recently.
• Rising real yields and still-low inflation break-evens mean that TIPS are getting more attractive as an investment in 2017.

In the 11 years of TIPS auctions with completed 10-year maturities, inflation was underestimated in seven of those years, and overestimated in four of those years.

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