By David Enna, Tipswatch.com
For several years, I’ve been tracking the performance of TIPS investments versus nominal Treasurys of the same term. Over the last decade, TIPS have been fairly lousy investments when compared to their nominal counterparts. That’s what happens when inflation runs at surprisingly low levels for years.
On April 15, 2021, a five-year TIPS matured. This was CUSIP 912828Q60, created at auction on April 21, 2016. In my preview article for that auction, I noted that the yield to maturity was likely to be negative to inflation, and down 68 basis points from a similar auction in December 2015. The auction a few days later ended up with a real yield to maturity of -0.195%.
So, with its negative yield to inflation, this was a lousy investment, right?
Wrong. It ended up outperforming a 5-year Treasury note, which at the time had a nominal yield of 1.35%. That created an inflation breakeven rate of 1.54%, pretty attractive. In actuality, inflation ended up averaging 2.1% over the next five years, giving this TIPS a 0.56% annual advantage over the nominal 5-year Treasury.
Understand that this is a rough estimate of performance, and it is based on inflation data starting two months before the month of TIPS issue. Inflation accruals for TIPS each month are based on inflation data from two months earlier. (That means the big jumps in inflation in March and April 2021 are not reflected in this data.)
Also, 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.
Nevertheless, it is clear that CUSIP 912828Q60 ended up being a winner when compared to a 5-year nominal Treasury, because inflation ended up running higher than its rather low inflation breakeven rate.
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he discusses can purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
Treasury Inflation-Protected Securities 
Thanks David
I am unaware of anyone else that provides this sort of head-to-head comparison. Actually I usually buy CDs instead of nominal Treasures, but the info is still very useful.
Back in April 2016 when I wrote the preview article, I noted that best-in-nation 5-year bank CDs were “paying up to 2.0%.” A CD at 2.0% would have done a bit better than the TIPS, lagging inflation by 0.1%, instead of a lag of 0.197% for the TIPS.
Right now, the 5-year Treasury is yielding 0.84% and the ver best 5-year CDs are paying 1%, but most of the big online bankers are at 0.75% to 0.80%, under the Treasury.
Your smart. Nothing wrong with a safe investment than Treasury bonds or CDs.
I’d give my right arm for a 5-year YTM of -.195% now – seems like a distant memory!