On a day when real and nominal yields were creeping higher, the Treasury’s auction of $26 billion in a new 5-year Treasury Inflation-Protected Security got a real yield to maturity of 1.367%, a good result for investors.
This is CUSIP 91282CQP9. The auction result set its coupon rate at 1.250%. The real yield of 1.367% was very slightly higher than the when-issued prediction of 1.365%. The bid-to-cover ratio was decent at 2.57. This auction was well supported by investors.
All morning, I had been tracking the nominal 5-year Treasury yield, which had been inching higher from 3.88% around 8 a.m. to 3.95% at the auction’s close. That rise, possibly connected to continued dim news from the Mideast, could have been a factor in today’s auction result by pulling real yields higher.
Definition: The “real yield to maturity” of a TIPS is its yield above future U.S. inflation, over the term of the TIPS. So a real yield of 1.367% means an investment in this TIPS would provide a return that exceeds official U.S. inflation by 1.367% for 5 years.
Here is the trend in the 5-year real yield over the last year, based on Treasury estimates, showing that today’s result is in the mid- to -lower range, but higher than very recent trends.
Click on image for larger version.
Pricing
This is a new TIPS, so its coupon rate was set to the 1/8th percentage point below the auctioned real yield. That resulted in an unadjusted price of 99.440535, a slight discount. In addition, this TIPS will carry an inflation index of 1.00235 on the settlement date of April 30. With that information, we can calculate the cost of a $10,000 par value purchase at this auction:
Par value: $10,000.
Principal on settlement date: $10,000 x 1.00235 = $10,023.50.
Cost of investment: $10,023.50 x 0.99440535 = $9,967.42.
+ accrued interest of $5.13 .
In summary, an investor purchasing $10,000 par value of this TIPS paid $9,967.42 for $10,023.50 in principal on the settlement date. From then on, the investor will earn accruals matching future inflation, plus an annual coupon rate of 1.25% on adjusted principal. The accrued interest will be returned at the first coupon payment on October 15.
Inflation breakeven rate
At the auction’s close, the 5-year Treasury note was trading with a nominal yield of 3.95%, which creates an inflation breakeven rate of 2.58% for this TIPS, the highest level at auction for this term since October 2022. Clearly, developments in the Mideast are raising inflation fears, especially in the shorter term.
Here is the trend in the 5-year inflation breakeven rate over the last year:
Click on image for larger version.
Thoughts
Even though the real yield was well below the 1.702% generated at last April’s originating auction, this seems like a decent result. Since April 2025, the Federal Reserve has cut short-term interest rates by 75 basis points. But at this point, the Fed looks likely to keep rates stable for several months.
In my preview article for this auction, I noted: “I think a real yield level around 1.30% to 1.35% seems reasonable. The Fed won’t be cutting rates anytime soon.” Market yields change by the minute, especially in the midst of global disruptions.
At mid-morning, I asked three AI bots to predict the result of today’s auction. Here were their predictions:
Claude and ChatGPT used my article to predict a range of 1.30% to 1.35%, which due to today’s market events ended up being a bit too low. Google’s Gemini ignored my input and overshot the yield by a wide margin.
TIPS auction results have always been difficult to predict. I’ve learned to be careful, qualified and modest in my predictions.
Did you invest today? What are your thoughts? Meanwhile, here is a history of 4- to 5-year TIPS auctions over the last five years:
Donate? This site is free and I plan to keep it that way. Some readers have suggested having a way to contribute. I welcome donations, any amount. And FYI, ads on this site pay for about one visit to Costco.
Follow Tipswatch on X for updates on daily Treasury auctions and real yield trends (when I am not traveling).
Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear. Please stay on topic and avoid political tirades.NOTE: Comment threads can only be three responses deep. If you see that you cannot respond, create a new comment and reference the topic.
David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and
Unexciting? These days, maybe that’s a good thing.
The U.S. Treasury on Thursday will auction $26 billion of a new 5-year Treasury Inflation-Protected Security — CUSIP 91282CQP9. The real yield to maturity and coupon rate will be set by the auction results.
At Friday’s market close, the Treasury was estimating the real yield of a full-term 5-year TIPS at 1.28%. Unless yield trends change dramatically this week, this TIPS will get the lowest April result in four years.
Definition: The “real yield” of a TIPS is its yield above official future U.S. inflation, over the term of the TIPS. So a real yield of 1.28% means an investment in this TIPS would provide a return that exceeds U.S. inflation by 1.28% for 5 years.
Will the auctioned real yield end up at 1.28%? Maybe, but watch for continued volatility this week. Also, keep in mind that April’s 5-year TIPS auction tends to get a bit higher real yield than the “market” estimate, because of its closing-months exposure to potential deflation in non-seasonally-adjusted CPI.
Since the April 2025 auction, the Federal Reserve has cut its federal funds rate three times — a total of 75 basis points. Of all TIPS auctions, the 5-year term is the most sensitive to cuts in short-term interest rates. I think a real yield level around 1.30% to 1.35% seems reasonable. The Fed won’t be cutting rates anytime soon.
Here is the long view of the 5-year real yield over the last 23 years, showing that 1.28% remains relatively attractive, but well below the recent high of 2.51% in October 2023. Fed rate cuts began in September 2024.
Click on image for larger version.
Pricing
Because this is a new TIPS, Treasury will set its coupon rate to the 1/8th percentage point below the auctioned real yield. That means its unadjusted price will be slightly below par value. CUSIP 91282CQP9 will carry an inflation index of 1.00235 on the settlement date of April 30, which will slightly increase the investment cost and the principal purchased by investors.
I’d guess the coupon rate will end up being 1.25%. The investment cost should be near par value, meaning if you purchase $10,000 par value of this TIPS, you will be paying somewhere around $10,000.
Inflation breakeven rate
The 5-year Treasury note closed Friday with a nominal yield of 3.84%, creating an implied inflation breakeven rate of 2.56% using current Treasury estimates. That’s a high number, the highest since a 3.34% breakeven at the April 2022 auction, just as U.S. inflation was surging higher. (Inflation in April 2022 was running at 8.3%, compared to 3.3% today.)
Is 2.56% too high? Probably not, given the uncertain future of energy prices and potential pass-through costs. Inflation over the last five years, ending in March, has averaged 4.5%.
Here is the long view of inflation breakeven rates over the last 23 years, showing the dramatic peak in spring 2022:
Click on image for larger version.
Alternatives
The Series I Savings Bond can still be purchased this week with a fixed rate of 0.90%, which is fairly competitive with a 5-year TIPS at 1.28%. The I Bond offers rock-solid deflation protection, better compounding, tax deferral of interest, and a flexible maturity date.
The TIPS works best for setting aside a specific amount of inflation-adjusted cash for use 5 years into the future. The I Bond works best as a secondary emergency fund, storing inflation-adjusted cash for use when you need the money.
Best-in-nation 5-year bank CDs are yielding around 4.0%, just a bit better than the 5-year Treasury note. That pushes the inflation breakeven rate out to about 2.72%. I consider a 5-year CD paying 4% to be attractive. I’d prefer the TIPS, though, for the inflation protection.
Thoughts
Investors should be cautious in using brokerage yield predictions to forecast where this auction is heading. Vanguard right now is showing an “indicative yield” of 1.20% for this auction. That is most likely based on current trading in the most-recent 5-year TIPS, issued in October. The October TIPS gets a lower real yield than the April TIPS. More on this.
The Treasury’s daily estimate , currently 1.28%, is going to be a more reliable predictor. But remember that yields will be changing before the auction.
I won’t be buying at this auction because I already have filled the 2031 rung of my long-term TIPS ladder. For investors, a real yield of 1.28% for 5 years qualifies as both “not bad” and “not exciting.” But today’s real yields are much better than the auction result of April 22, 2021 … -1.631%.
This TIPS auction closes Thursday at 1 p.m. ET. Non-competitive bids at TreasuryDirect must be placed by noon Thursday. If you are putting an order in through a brokerage, make sure to place your order Wednesday or very early Thursday, because brokers cut off auction orders before the noon deadline.
I will be posting the auction results soon after the close on Thursday. Here is a history of results for this term over the last 5 years:
Donate? This site is free and I plan to keep it that way. Some readers have suggested having a way to contribute. I welcome donations, any amount. And FYI, ads on this site pay for about one visit to Costco.
Follow Tipswatch on X for updates on daily Treasury auctions and real yield trends (when I am not traveling).
Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear. Please stay on topic and avoid political tirades.NOTE: Comment threads can only be three responses deep. If you see that you cannot respond, create a new comment and reference the topic.
David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
I am buying in April. A lot of you will disagree. There is no wrong answer.
By David Enna, Tipswatch.com
Let’s take a moment to ponder what happened in March: The United States went to war in the Mideast, gas prices surged higher, the stock market fell into chaos (briefly) and U.S. inflation took a huge leap higher.
Way down on our list of concerns was: What’s going to happen to Series I Savings Bonds at the May 1 rate reset? On February 27, I would have confidently told you:
The variable rate was going to fall to about 2.0% from the current 3.12%.
The fixed rate was going to fall to 0.8% from the current 0.9%.
And the composite rate would fall (for I Bonds purchased from May to October) to about 2.81%, down from the current 4.03%.
Wrong. Wrong. Wrong.
But before we get into that, let’s look at …
I Bond basics
I Bonds are U.S. government savings bonds designed to protect your savings from inflation. They offer a combination of interest rates that adjust for inflation, making them a popular choice for conservative investors.
The fixed rate of an I Bond will never change. Purchases through April 30, 2026, will have a fixed rate of 0.90%, which means the return will exceed official U.S. inflation by 0.9% until the I Bond is redeemed or matures in 30 years. The fixed rate will reset on May 1.
The inflation-adjusted rate (often called the I Bond’s variable rate) changes each six months to reflect the running rate of inflation. That rate is currently 3.12%, annualized, for six months. It will adjust again on May 1, 2026, rolling into effect for all I Bonds, no matter when they were purchased.
The current composite rate is 4.03% annualized for six months for purchases through April 2026.
I Bonds are an extremely safe and conservative investment. Interest accrues monthly and principal can never decline, even in times of deflation. Investments are limited to $10,000 per person per calendar year for electronic I Bonds held at TreasuryDirect. There is also a “gift box” strategy some investors use to stack purchases for future years.
I Bonds have many positives. For example, earnings are free of state income taxes and federal taxes can be deferred until the I Bond is redeemed or matures. Also, I Bonds are a simple investment to buy and track, much simpler than a TIPS with a constantly changing market value and inflation accruals that update daily.
The variable rate
This is set in stone: Because of March’s lofty inflation, the I Bond’s inflation-adjusted variable rate will rise from the current 3.12% to a new rate of 3.34%. This is based on non-seasonally adjusted inflation for the months of October 2025 to March 2026, an increase of 1.67%. The I Bond’s rate-setting formula doubles the six-month inflation rate to create the new variable rate.
All I Bonds, no matter when they were issued, will eventually get the variable rate of 3.34% for six months, with the starting month depending on the original purchase month. From TreasuryDirect:
It’s important to remember that the new variable rate will apply to all I Bonds ever issued (no I Bonds have yet matured). A purchase in April will get that new, higher variable rate starting in October.
Conclusion: The I Bond’s variable rate will rise to 3.34% at the May 1 reset.
The fixed rate
The Treasury has no legal requirement or public formula for setting the I Bond’s fixed rate. The decision is at “the discretion of the Treasury Secretary.” However, we know Treasury tracks trends in real yields and adjusts accordingly. This forecasting formula has worked for the last decade: Take the average real yield of the 5-year TIPS over the preceding six months and apply a ratio of 0.65.
For this reset, we are interested in 5-year real yields from November 2025 to April 2026. There are only 13 market days left before the reset, so we can now get a solid projection:
The formula, which has been accurate for a decade, projects that the fixed rate will remain at the current level, 0.9%. That would be true even if the 5-year real yield — currently at 1.36% — suddenly plummeted to an average of 1.10% for the next 13 market days.
However … This projection is based on 10 years of Treasury history in setting the I Bond’s fixed rate. But the Treasury could change course at any time and we should be aware of that. President Trump’s first-term Treasury followed the formula and has continued to do so in his second term.
Conclusion. It looks highly likely that the I Bond’s fixed rate will hold at 0.90%.
Composite rate
If we assume the fixed rate holds at 0.90% and the variable rate rises to 3.34%, we are looking at a new composite rate of 4.26%, up from the current 4.03%, for I Bonds purchased from May to October 2026. This is based on the formula the Treasury uses to calculate the composite rate:
[Fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]
If I did my math right, this formula results in the composite rate of 4.26%.
This same annualized composite rate, 4.26%, will apply to I Bonds purchased in April, after six months of earning the current rate of 4.03%.
So we know that an investor purchasing in April will earn 4.03% for six months and then 4.26% for six months, earning a combined rate of 4.16%. An investor purchasing any time from May to October will earn 4.26% for the first six months and then an undetermined rate for the next six months.
Conclusion. The I Bond’s composite rate will rise to 4.26% at the May 1 reset.
The buying decision
Buy now. As I noted at the top, I will buy my full allocation of I Bonds ($10,000 per person per year) later in April. With that decision, I know I will earn 4.16% over the next 12 months, while retaining the permanent 0.90% fixed rate. This is the “sure thing” decision, and I happen to have cash available to make the purchase.
If you are buying in April, I recommend setting the purchase date no later than April 28 on TreasuryDirect to make sure it gets processed ahead of the rate shift.
Buy later. Buying in May would be fine, but most investors who don’t buy in April will hold off investing until at least October 14, when the September inflation report is released and sets the next variable rate, to be reset November 1. At that point investors will also have a very good idea of the next fixed rate.
If you think the fixed rate could be rising in November, it makes sense to wait. Using our standard formula, the 5-year average real yield would need to rise to 1.47% over the next six months to boost the fixed rate to 1.0%. That isn’t unreasonable. So waiting could make sense.
One thing to consider is that the fixed rate announced in November will be available for purchases through April 2027, when the purchase cap resets. Also, realize that a 10-basis-point increase in the fixed rate amounts to $10 a year on a $10,000 investment. It’s not life changing.
Risks of buying now. The fixed rate soars higher in November and you feel miserable about your impatient purchase. (Not likely, but anything can happen.)
Risks of buying later. The biggest risk (also slim) is that the Treasury tosses out its traditional rate-setting formula and drops the I Bond’s fixed rate at the May reset. Another more possible risk, but not as important financially, is that inflation will plummet from April to September and the November variable rate is lower than the current 3.12%.
April 23, 2026, update: TreasuryDirect has now posted this notice on its homepage:
Over the years, TreasuryDirect has refined its wording on this sort of notice and this one — finally! — is accurate. The new rates will be announced April 30 and any purchase on April 30 will become a May 2026 I Bond.
Short-term investment?
A combined composite rate of 4.16% looks attractive when you compare it to the nominal yields of a 4-week (3.67%) or 1-year (3.70%) T-bill. But remember that you have to hold an I Bond for one year and if you redeem at that point you lose the latest three months of interest.
Not worth it. If you buy late in April and then redeem in April 2027, you will lose the last three months of interest, meaning your total return would be 3.08%. You can do better buying a 1-year T-bill.
Rolling over I Bonds
If you are holding I Bonds with 0.0% fixed rates, you are currently earning a composite rate of 3.12%, and that will rise to 3.34% when the new variable rate kicks in. That’s not bad. There’s no reason to rush to sell these, but if you need to raise cash to purchase 0.90% I Bonds, redeeming and repurchasing makes sense.
I generally encourage people to continue holding I Bonds “until you need the cash.” It’s great to have these savings bonds growing tax-deferred with zero risk.
If you do a roll over, you will owe federal income taxes on the interest earned, and if your withdrawal is more than $10,000 (because of earned interest) you’ll only be able to buy $10,000 in new I Bonds in 2026. Also, time your redemption for early in the month because you earn no interest in the month of redemption.
Gift-box strategy
I don’t think there is a compelling need to “load up” on I Bonds in 2026, but that might change later in the year if the fixed rate surges higher. Although I have used it, I am not a fan of the gift-box strategy, mainly because the Treasury has made no attempt to clarify the rules and in fact has muddied the waters.
Conclusion
When should you purchase? There is no wrong answer. Buying in April or later in the year will likely generate similar financial returns. Getting an I Bond with a fixed rate of 0.90% remains attractive. This is a personal decision, but I still encourage investing in I Bonds as an inflation-adjusted, tax-deferred store of cash.
What are your investment plans? Discuss in the comments section!
Donate? This site is free and I plan to keep it that way. Some readers have suggested having a way to contribute. I would welcome donations. Any amount, or skip it, your choice. This is completely optional.
Follow Tipswatch on X for updates on daily Treasury auctions and real yield trends (when I am not traveling).
Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear. Please stay on topic and avoid political tirades.NOTE: Comment threads can only be three responses deep. If you see that you cannot respond, create a new comment and reference the topic.
David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
U.S. all-items inflation rose 0.9% in March to an annual rate of 3.3%.
By David Enna, Tipswatch.com
The March inflation report — a stunner, but not a surprise — showed that non-seasonally-adjusted all-items inflation rose 0.9% for the month, matching expectations after a massive surge higher in energy costs. The annual inflation rate rose to 3.3%, up from 2.4% in February.
This report is one of the most important of the year for investors in U.S. Series I Savings Bonds, because March inflation marks the end of a six-month string that will reset the I Bond’s variable rate on May 1. This is based on non-seasonally-adjusted inflation for the months of October 2025 to March 2026.
For March, the Bureau of Labor Statistics set the CPI Index at 330.213, an increase of 1.05% for the month. That resulted in an increase of 1.67% for the six-month rate-setting period, meaning the I Bond’s new inflation-adjusted variable rate will be 3.34%, up from the current 3.12%. Here are the data:
All I Bonds, no matter when they were issued, will eventually get the variable rate of 3.34% for six months, with the starting month depending on the original purchase month. The I Bond’s fixed rate will also be reset on May 1, but it looks likely to continue at 0.9%, meaning the new composite rate would be 4.26%, up from the current 4.03%.
An investor purchasing I Bonds in April will get a six-month annualized return of 4.03%, and then 4.26% for six months. But there is plenty of time to consider when to invest. Purchases through the end of April earn a full month of interest. I will be writing more on this “when to buy?” topic on Sunday.
What this means for TIPS
The Treasury uses non-seasonally-adjusted inflation in March to set daily inflation indexes for Treasury Inflation-Protected Securities in May. The March report means that principal balances for all TIPS will rise 1.05% in May, after rising 0.47% in February. Here are the new May Inflation Indexes for all TIPS.
The inflation report
Because of the extreme disruption to global energy markets in March, economists were expecting a dramatic surge higher in all-items inflation. The increase of 0.9% for the month met expectations.
Core inflation came in slightly below expectations for both the month and year, which could help soothe financial markets. But a jump in annual inflation from 2.4% in February to 3.3% in March is stunning. That is the highest annual inflation rate since April 2024.
And the trend could continue in April when missing housing data from October are added back into the CPI report. Because of the government shutdown, the BLS assumed zero increase in shelter costs in the month of October. That was highly unlikely. Here is the annual trend for all-items and core inflation, showing the remarkable gap in data:
In addition, in this March report the BLS said U.S. gasoline prices rose 21.2%, which indicates it did not capture the full month of price increases. The national average gas price started the month at about $3.15 and ended the month at about $4.16. That is an increase of 32% and prices have continued rising in April. This trend will continue.
Also in the March report:
Fuel oil prices rose a whopping 30.7% and are now up 44.2% for the year.
The overall energy index was up 10.9% in March, the highest increase since September 2005.
Food at home costs declined 0.2% and were up only 1.9% for the year. This trend could reverse as delivery costs begin to rise.
Shelter costs were up 0.3% and 3.0% for the year. We could see a bump higher in April as the missing October data are replaced by April survey numbers.
Apparel costs rose 1.0% in March after rising 1.3% in February.
Airline fares rose 2.7% for the month and are up 14.9% year over year.
New vehicle costs rose 0.1% for the month and are up only 0.5% for the year.
Prices of used cars and trucks fell 0.4% in March and were down 3.2% for the year.
The one bright spot in the March report is that food costs have moderated (egg prices were down 3.4%), but as I noted this progress could be stalled because of rising delivery costs caused by soaring gas prices.
What this means for interest rates
The current Federal Reserve isn’t going to budge interest rates higher or lower as the nation adapts to the inflationary shock of global gas prices. So I’d expect short-term interest rates to remain stable in the near term.
The core inflation numbers were slightly better than expected, which should help to soothe market jitters. But energy costs are a major concern. From Bloomberg’s report this morning:
The data underscore how the war in the Middle East is beginning to ripple through the US economy, worsening the affordability woes many households have faced in recent years. Americans are already experiencing higher prices at the pump, and service providers including Delta Air Lines Inc. and the US Postal Service have warned of price hikes ahead. …
“Looking ahead, we expect a similarly sized rise in headline CPI in April,” Kathy Bostjancic, the chief economist at Nationwide, said in a note after the release. “Even if a long-lasting deal to end the war is reached and the Strait of Hormuz is fully re-opened, it would take months for oil, gasoline, diesel and other commodity supplies to snap back to pre-war levels.”
The chaotic events of March reaffirm my long-standing commitment to allocating a portion of my investment portfolio to inflation protection, in the form of I Bonds and TIPS. These investments provide insurance. It’s best not to need the insurance, but comforting when you do need it.
If you are just learning about these investments, read these:
Donate? This site is free and I plan to keep it that way. Some readers have suggested having a way to contribute. I would welcome donations. Any amount, or skip it, your choice. This is completely optional.
Follow Tipswatch on X for updates on daily Treasury auctions and real yield trends (when I am not traveling).
Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear. Please stay on topic and avoid political tirades.NOTE: Comment threads can only be three responses deep. If you see that you cannot respond, create a new comment and reference the topic.
David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
CUSIP 91282CCA7 had one of the ugliest TIPS auctions in history. And yet … it did well versus a nominal Treasury.
By David Enna, Tipswatch.com
Back in April 2021 I was out-of-my-mind frustrated by ultra-low real and nominal yields that offered little chance to surpass inflation. In those days, elite money market funds were yielding about 0.01% as the Federal Reserve held short-term interest rates near zero.
So I was intrigued (more out of boredom than financial sense) by the Treasury’s auction on April 22, 2021 of a new 5-year Treasury Inflation-Protected Security, CUSIP 91282CCA7. At the time, I was interested in “nibbling” into TIPS auctions after a long spell on the sidelines.
But I decided against a purchase. In my preview article for that auction I noted:
As of Friday’s market close, the Treasury was estimating the real yield to maturity of a 5-year TIPS at -1.73%, meaning an investor would be willing to receive a return that trails official U.S. inflation by 1.73% over the next five years.
Investors are going to pay a premium of about 9% above par for this TIPS, and then will receive coupon interest of 0.125% plus accruals to principal matching inflation over 5 years.
In closing, I noted that I Bonds were the superior investment:
You can purchase a U.S. Series I Savings Bond today and get a fixed rate of 0.0%, which means its real yield is 0.0% and your investment will very closely match future U.S. inflation for as long as you hold the I Bond. That is a 173-basis-point advantage over a 5-year TIPS.
At its originating auction, CUSIP 91282CCA7 got a real yield to maturity of -1.631%, which at the time was the lowest real yield at auction for any TIPS in history.
How did CUSIP 91282CCA7 do?
The February 2026 inflation report, issued March 11, closed the books on this TIPS. It will end with an inflation index of 1.24296 on the April 15 closing date. That reflects cumulative inflation of 24% over five years.
CUSIP 91282CCA7 ended up providing a nominal return of 2.715% over the next five years. At the time, a 5-year Treasury note had a nominal yield of just 0.82%, an incredibly low number. So the TIPS ended up outperforming the nominal Treasury by an annual rate of 1.89%.
Why did the TIPS outperform? When it was issued, it had an inflation breakeven rate of 2.45%, a very high number coming out of a decade of low inflation. But by April 2021 inflation had already started surging higher, with the annual rate rising from 1.2% in November 2020 to 4.2% in April 2021 — eventually reaching a high of 9.1% in June 2022.
In the five years after April 2021, inflation averaged 4.3%, well above the inflation breakeven rate of 2.45%. And that resulted in the TIPS outperforming the nominal Treasury. This result continues a six-year string of out-performance of TIPS over nominal Treasurys.
If you purchased an I Bond in April 2021, it had a fixed rate of 0.0%, much more attractive than the auctioned yield of -1.631% for this TIPS. By April 2026, the value of the I Bond had increased 24%, for an annual return of about 4.3% — easily exceeding the 2.7% for the TIPS or 0.8% for the nominal 5-year Treasury at the time. (Source: Eyebonds.info).
How about bond funds?
Vanguard’s Total Bond Fund (BND) has had a total annual return of 0.25% over the last five years, according to Morningstar. That poor performance was caused by the beating it took in 2022, when its annual return was -13.1%.
The iShares TIPS ETF (TIP), which holds the full range of maturities, has had a total annual return of 1.25% over the last five years, also under-performing CUSIP 91282CCA7.
Vanguard’s Short-Term TIPS ETF (VTIP) has had a total annual return of 3.46% over the last 5 years, better than CUSIP 91282CCA7’s performance. It benefits from a shorter duration and counter-acting gains from higher inflation.
There’s a lesson here
Two very important takeaways: 1) An I Bond with a fixed rate of 0.0% will be a very attractive investment any time the Federal Reserve decides to repress interest rates through quantitative easing. And 2) Even a TIPS with a negative real yield can be “relatively” attractive if the inflation breakeven rate is lower than seems likely.
Side note: I eventually did make a small purchase ($5,000 par) of CUSIP 91282CCA7 at the June 17, 2021 reopening auction when it got a real yield to maturity of -1.416%. The investment amount was $5,480 — a steep premium because of the negative yield.
This June 2021 version had a slightly better nominal return of 2.767%. The payout on April 15 will be $6,214.80, plus one final, very small coupon payment.
Keep in mind that interest on a nominal Treasury and the TIPS coupon rate is paid out as current-year income and not reinvested. So in the case of a nominal Treasury, the interest earned could be reinvested elsewhere, which would potentially boost the gain. For certain, we don’t know what the investor could have earned precisely on an investment after re-investments.
In the case of a TIPS, the inflation adjustment compounds over time, and that will give TIPS a slight boost in return that isn’t reflected in the “average inflation” numbers presented in the chart.
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
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Treasury Inflation-Protected Securities 
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