The Treasury will auction a 5-year TIPS on Dec. 15, probably a reissue of CUSIP 912828QD5 that currently carries a yield-to-maturity of -0.980%. Yes, that is a negative, and it means buyers of this TIPS are willing to accept a rate of return nearly 1% lower than the rate of inflation for the next five years.

Why would they do that?

1) This TIPS is a super-safe investment, 2) world markets are still in turmoil and super-safe investments look attractive, 3) the Federal Reserve won’t budge on raising interest rates anytime soon, and 4) there aren’t many super-safe alternatives.

• A 5-year nominal Treasury is paying 0.92%. That means the TIPS buyer needs inflation to run at 1.9% or more over the next 5 years to win over a nominal Treasury. Not a bad bet, plus the buyer gets protection from higher inflation.
• The best 5-year CD is paying 1.84% (Ally Bank, as of Friday). That one actually competes pretty well with the 5-year TIPS, pushing the break-even inflation rate up to 2.82%. Before you buy that 5-year TIPS, look hard at this CD. But you would give up protection against higher-than-expected inflation.
• On the other hand, the average 5-year bank CD is paying 1.17%, not very attractive versus the TIPS.

I Bonds, still the better investment. If you didn’t buy I Bonds before the Oct. 31 interest-rate change, go ahead, kick yourself. The six-month rate fell from 4.6% to 3.06% for the six months ending in April 2012. (Buyers get the current rate for six months after the purchase, so you could have guaranteed yourself a 2.3% 1-year return, or better.)

Forget that 4.6% rate. If you haven’t bought I Bonds in 2011, you should still ponder this investment before Dec. 31. Here’s why: The Treasury puts yearly limits on I Bond purchases. You can buy $5,000 in Treasury Direct and $5,000 in paper bonds each year. A couple can buy twice that. Paper bonds will no longer be issued after Dec. 31, except as a tax refund.

So you could still load up on this I Bond in 2011 (paper and electronic) and then again in 2012 (just Treasury Direct purchases and your tax refund).

I Bonds currently carry a base interest rate of 0%, plus an inflation-matching interest rate that changes every six months. That makes them much more attractive than a 5-year TIPs with a return that is is 0.98% below the inflation rate. Zero is good. Negative 0.98 is bad.

The current I Bond interest rate – 3.06% – guarantees that you will receive a 1-year return of 1.53%, but probably higher, even if you sell after one year and pay a three-month interest rate penalty. If you sell after 5 years, there is no penalty.

While you could consider a 5-year CD if you can find an attractive rate, there really is no contest between this I Bond purchase and the 5-year TIPS reissue of Dec. 15. I Bonds are still the clear winner, even at a lower interest rate.

And if you have purchased I Bonds up to the limit in 2011, you can hold that investment for one month and buy them again in January 2012.