The Treasury on April 19 will auction a new issue 5-year Treasury Inflation-Protected Security, and it is likely to have a deeply negative base interest rate. I am going to try my best to explain why anyone would buy this issue — skeptics are going to tell you it is a disastrous investment. Negative rates!

Yes, the base rate is negative, but the principal on TIPS continues to grow at the rate of inflation until maturity, at least partly balancing off that negative base rate. So if inflation runs high enough, a 5-year TIPS works out well for the buyer. Otherwise, it can be a loser. But how much of a loser?

Right now, a 5-year TIPS maturing July 15, 2017, is selling on the secondary market with a yield to maturity of -1.148%. The new issue should come in around that rate. (But I suspect the rate will be more favorable, possibly around -1.0%; that has been the trend at recent auctions).

But let’s assume the auction goes off at -1.148%. That looks like a very bad rate, I admit. How does it stack up against similar super-safe investments?

I Bond, zero base rate, plus rate of inflation
5-year TIPS -1.148%, plus rate of inflation
5-year Treasury 1.03% fixed rate
5-year insured CD 1.75% fixed rate

Let’s look at the returns these investments would generate under varying rates of inflation:

Assumption No. 1: Inflation averages 1% over the next five years

• 5-year insured CD 1.75%
• 5-year Treasury 1.03%
• I Bond, 1%
• 5-year TIPS, -0.148%

The TIPS is the big loser, the bank CD is the winner.

Assumption No. 2: Inflation averages 2% over the next five years

• I Bond, 2%
• 5-year insured CD 1.75%
• 5-year Treasury 1.03%
• 5-year TIPS, 0.852%

The I Bond edges out the bank CD, the TIPS is the least favorable investment.

Assumption No. 3: Inflation averages 3% over the next five years

• I Bond, 3%
• 5-year TIPS, 1.852%
• 5-year insured CD 1.75%
• 5-year Treasury 1.03%

The I Bond again leads the way, but now the TIPS has surpassed the bank CD.

Assumption No. 4: Inflation averages 4% over the next five years

• I Bond, 4%
• 5-year TIPS, 2.852%
• 5-year insured CD 1.75%
• 5-year Treasury 1.03%

Assumption No. 5: Inflation averages 5% over the next five years

• I Bond, 5%
• 5-year TIPS, 3.852%
• 5-year insured CD 1.75%
• 5-year Treasury 1.03%

The lesson of this exercise: Buy I Bonds, up to the limit ($10,000 per individual and $20,000 for a couple.)

But after you reach that limit, you should weigh a bank CD against a 5-year TIPS. If you can get a rate of 1.75% on a bank CD, you push the TIPS breakeven rate all the way up to 2.898%. The bank CD is a winner unless inflation averages more than 2.9% a year for five years. And with a bank CD, you might be able to get an attractive early withdrawal penalty, making it a more flexible investment.

If you really, really fear inflation in the next five years, this TIPS makes sense for you. If you think inflation will remain under 3%, then a bank CD might be the better option.

Otherwise, it looks like demand for this 5-year TIPS new issue will come from the high-roller investment firms and foreign banks. It isn’t very appealing for the small investor.