This week’s 5-year TIPS auction will be the most attractive since the pandemic surge

I Bonds remain the preferred inflation-protected investment. But a 5-year TIPS could be an addition to your inflation-fighting arsenal.

By David Enna,

The U.S. Treasury will offer $20 billion in a new 5-year Treasury Inflation Protected Security at auction on Thursday. This is CUSIP 91282CEJ6, and the coupon rate and real yield to maturity will be set by the auction results.

As of Thursday’s market close (no data for Good Friday), the Treasury estimated the real yield of a 5-year TIPS at -0.54%, a remarkable 104 basis points higher than where we started this year. Real yields — especially for shorter- and medium-term TIPS — have been surging in response to the Federal Reserve’s commitment to raise short-term nominal rates and also begin reducing its huge balance sheet of U.S. Treasurys.

The Fed stopped buying TIPS and other Treasurys in mid March and also “generally agreed” that it is prepared to reduce its balance sheet of Treasury issues by up to $60 billion a month. This could possibly begin in May. The result “should” be higher interest rates across all maturities.

Consider this: In Thursday’s auction, the Treasury will be offering $20 billion in a new 5-year TIPS, the highest auction amount in history for this term, and up 10% from the same offering a year ago. But at the same time, the Treasury won’t be adding TIPS to its balance sheet, and is preparing to let its balance sheet decline, meaning no reinvestment. Again, this “should” result in higher interest rates.

If the history of the last tightening cycle repeats itself, we should see 5-year TIPS real yields rise at least another 100 basis points. But that forecast is highly uncertain, because if inflation continues surging then demand for TIPS will be very strong, which will support yields at this level. On the other hand, if the U.S. economy sinks into recession, the Fed will likely launch another era of stimulus, and 5-year real yields could sink deeply negative.

Got it? The future is uncertain.

For that reason, I am not opposed to nibbling into this auction, if 5-year real yields hold in the -0.50% range this week. The one great thing about a 5-year TIPS is that the term is only 5 years. Even though you’ll pay a premium price, you probably won’t lose money and could do decently if inflation continues at a moderately high pace.

But wait, how can you lose money on a TIPS, an investment that guarantees return of your original par value? That’s true in “normal” times, when TIPS have real yields positive to inflation. In the current market, with negative real yields, buyers pay a premium price over par to invest in TIPS, and the premium is not guaranteed to be returned at maturity. I don’t think this has ever happened in TIPS history, but it is “possible.”

Here is a history of the 5-year real yield over the last five years, showing how the yield surged to an attractive level (around 1.0%) during the closing days of tightening in late 2018 and then plummeted in response to the Fed’s quantitative easing following the pandemic surge of March 2020:

What to expect

Definition: The “real yield” of a TIPS is its yield above or below official U.S. inflation, over the term of the TIPS. So a real yield of -0.54% means this TIPS will trail U.S. inflation by 0.54% for 5 years. A negative real yield isn’t necessarily a bad investment; the quality of the investment will depend on whether inflation rises above expectations in future years.

If the real yield holds at around -0.54% at Thursday’s auction, the coupon rate will be set at 0.125%, the lowest the Treasury will go for any TIPS. That means investors will be paying a premium price, because the real yield to maturity will be much lower than the coupon rate. The price should be roughly about $103.70 for $100.42 of value, after accrued inflation is added in. The inflation index will be 1.00424 on the settlement date of April 29.

Key point: Investors also know that in May, principal balances for this TIPS will get an immediate boost in value of 1.34%, the rate of non-seasonally adjusted inflation in March. That’s pretty appealing. I’m expecting demand to be reasonably strong, but recent TIPS auctions have received lukewarm investor interest.

Inflation breakeven rate

With a 5-year nominal Treasury closing last week at 2.79%, this TIPS has a current estimated 5-year inflation breakeven rate of 3.33%, a rather lofty number. That means that for this TIPS to outperform a nominal Treasury of the same term, inflation would have to average 3.33% over the next 5 years. I think investors are front-loading a lot of inflation in 2022, but then see it dropping to a rate of 4% to 5% by the end of the year. After that …. er … the future is uncertain.

I can track 5-year inflation breakeven rates back to 2003, and at no time — until the last several months — has the 5-year inflation expectation ever exceeded 3%. We have entered a new era.

The inflation breakeven number is important because it tells you the relative cost of a TIPS investment. A high inflation breakeven rate — anything above 2.75% — means a TIPS is “expensive” versus a nominal Treasury of the same term. We are well above “expensive” at this point, but rightly so with U.S. inflation currently running at a annual rate of 8.5%.

Here is the trend in the five-year inflation breakeven rate over the last five years, showing the surge higher in the aftermath of aggressive economic stimulus by both the Fed and Congress in the wake of the pandemic surge two years ago:

Obvious alternative: I Bonds

Over the last two years, I have recommended putting your first $10,000 inflation-protected investment (per person) into I Bonds, which have an effective real yield of 0.0%, currently 54 basis points higher than a 5-year TIPS. In essence, I Bonds would be about 3.3% more valuable than a 5-year TIPS, if I Bonds could be traded on an open market (they can’t be).

I Bonds remain the superior investment, across pretty much the entire TIPS maturity spectrum, since I Bonds can be redeemed after five years with no penalty, or held for 30 years if that is what you desire. Plus, taxes on the interest is tax-deferred, and I Bonds provide better deflation protection.

However … there is always a however … things will change when and if real yields on TIPS rise well above zero. At that point, the equation shifts toward individual TIPS, because there is no annual purchase limit. I’d still buy I Bonds, though. I always buy I Bonds, just in case we hit a bizarre scenario like we are seeing in April 2022: high inflation and very low nominal rates.

Another investment to consider for the future is 5-year insured bank CDs, which even at the best-in-nation banks are now paying a pathetic 2.0%, well below the 5-year Treasury note at 2.79%. In my opinion, this is a scandal, but the National Enquirer won’t be doing any front page stories on it. If you are thinking about a bank CD, it’s probably still better to look at 1-year CDs and try to get more than 1% in a time of 8.5% inflation. Or, even better, the 2-year nominal Treasury is paying 2.47% right now; it is the “sweet spot” of the nominal Treasury curve.


This 5-year TIPS auction, viewed outside of the current Fed hiking trend, is ugly but attractive enough. I might chip in with a small (very small) purchase to keep my TIPS ladder interesting. Higher real yields seem highly likely in the future, but as I seem to say often … the future is uncertain.

This auction closes for non-competitive bids at TreasuryDirect at noon EDT on Thursday. If you are buying through a brokerage account, you should make your purchase either Wednesday evening or early Thursday, because auction orders close early at brokerages. I will be posing the auction results soon after it closes at 1 p.m. EDT Thursday.

Here is a history of 4- to 5-year TIPS auctions over recent years. Notice that at the tail-end of the last Fed tightening cycle a 5-year TIPS reopening on December 20, 2018, generated a real yield of 1.129%. Eventually, we could be heading there?

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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.

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.


About Tipswatch

Author of blog, David Enna is a long-time journalist based in Charlotte, N.C. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website.
This entry was posted in Bank CDs, I Bond, Investing in TIPS. Bookmark the permalink.

28 Responses to This week’s 5-year TIPS auction will be the most attractive since the pandemic surge

  1. Tipswatch says:

    Update, Tuesday evening: The Treasury’s estimate of the 5-year real yield climbed to -0.45% after closing Monday at -0.57%, so an increase of 12 basis points.

    • Ric Dee says:

      Hi David
      I have $10,000 in a Fidelity Money Market account earning very little.
      If you were me and were deciding to invest in either the current TIPS auction or 2 or 10 year Treasuries or keeping it in Fidelity for now.
      Which would you do?
      I already have the max in iBonds

      • Tipswatch says:

        I am assuming you have no need of the money in the short term? With Thursday’s TIPS auction you are going to under-perform inflation by about 0.5% over 5 years, but that is definitely better than earning zilch in a money market account. Then again, money market funds should be paying more by the end of the year, maybe even close to 2%.

        The 2-year Treasury is yielding 2.61% right now, pretty attractive by recent standards but well below current inflation. Inflation would have to average more than 3.01% over the next two years for the TIPS to beat that. (It probably will, but no sure thing.)

        Next month’s 10-year TIPS auction could be a good one, too. It might have a yield positive to inflation.

        All of these are safe investments. If inflation runs high, the TIPS will beat a nominal investment. But if the economy cools and inflation sinks, that 2-year Treasury will probably seem attractive.

  2. Lorax says:

    I understand that this Thursday’s 5 year TIPS auction is a “new” auction, but then there will be a 5 year TIPS “reopening” auction in the future.

    When with the reopening auction be and what is the practical difference between a “new” auction and a “reopening” one?

    thank you 🙂

    • Tipswatch says:

      Yes, this is a new TIPS being auctioned Thursday. and it will be reopened at auction in June. Then another new 5-year TIPS will be auctioned in October and then reopened in December. There really isn’t much difference except that the originating auction sets the coupon rate, which in this case will be 0.125%, the lowest the Treasury goes for a TIPS.

      When a TIPS reopens, it is already trading on the secondary market, so it should be fairly easy to predict the auction price. New TIPS are a bit harder to predict. Also, a new TIPS generally carries a low inflation index, which indicates the additional principal you’ll be buying on the settlement date. A reopened TIPS will generally have a higher inflation index.

  3. Greg says:

    Am I misreading Treasury data, or are secondary market 20+ year TIPS now offering positive real yields vs negative just a month or two ago?

    What’s not attractive about locking in a positive real return for those looking to preserve purchasing power long term?

    • Tipswatch says:

      I’d say that as long as you intend to hold a 20-year TIPS to maturity, no problem. This is a volatile issue and if real yields rise just 1% that TIPS can lose about 20% of its value. (The 20-year real yield has already increased 77 basis points this year.) There are no 20-year TIPS auctions, so you would need to buy one on the secondary market. The issue maturing Feb 15 2042 has an inflation index of 1.249, meaning you’d be buying a lot of additional principal. I imagine that these TIPS are lightly traded so you’d need to watch the pricing carefully. The premium pricing though is only about 6% for the coupon rate of 0.75%.

      • Clark says:

        Can you clarify your concern of “buying a lot of additional principal” with an inflation index of 1.249? If we assume a zero percent yield at purchase on the secondary market for simplicity, would not the TIPS just rise at the rate of inflation until maturity, making the inflation index immaterial at the time of purchase? Apologies if this is dense.

        • Tipswatch says:

          When you purchase a par amount of this TIPS (let’s say $10,000) you will also be purchasing an additional $2,400 of principal, which is above par and is not protected against deflation. The accrued inflation is on top of par value, and only the par value is protected against deflation at maturity. Again, this isn’t a huge deal because inflation is likely to exceed deflation over the next 20 years.

  4. Joe Keenan says:

    What is your view on 3 to 5 year TIP mutual funds or ETFs?

    • Ladder Up says:

      Buy individual TIPS and hold to maturity. Otherwise you are going to have to deal with the high volatility of fund pricing based on investors’ future perception of what inflation will be. With TIPS held individually and bought at auction, you know exactly what you will get, and when you will get it. If – like now – you do pay a premium (the negative real yield), you can rest assured you’ll collect all the upside with these inflation numbers.

    • Tipswatch says:

      Sure, I would rather own individual TIPS, but I do have holdings in SCHP and VTIP in a tax-deferred account. I prefer VTIP at this stage of the cycle. It holds TIPS of 0 to 5 years, so the duration risk is fairly low. Upside is also low. But if inflation stays elevated it will do fine. VTIP has a year-to-date total return of -0.49%, versus -5.02% for SCHP.

  5. Ladder Up says:

    Oh man, I am buying at this auction. With this inflation and the uptick in real yields from last year, I am filling out my 2027 and 2028 ladders completely with this. And, today, I also bought in the defined-maturity-ETFs (Ishares ibonds and bulletshares are examples) to add to my 2025 and 2026 ladders. My God, the prices on those have plummeted (7+percent) because of rising rates, and the yield-to-maturity (YTM) on those is now looking really attractive. It’s blood in the street time on bonds!

  6. peter ledermn says:

    My head can’t resolve one point and would appreciate your clarity. If I wind up paying let’s say a 5% premium on my order of $60,000 worth of TIPS ….is the principal upon which the coupon rate is paid the $60,000 I ordered or the $63,000 I paid. Thanks so much neither my broker or accountant could answer that for me.

    • Tipswatch says:

      OK, I totally agree that TIPS pricing can be confusing in this negative-yield world, and I am not an accountant (but both my dad and wife were). When you buy a TIPS at auction, there are three factors that will determine the price you pay:

      1) The par value, which in this case would be $60,000. That is principal and it will be adjusted for inflation going forward.
      2) The inflation index at the settlement date, which in the case of this 5-year TIPS will be about 0.4%. You pay for that, and it also becomes part of your principal which will be adjusted for inflation going forward.
      3) The premium price you pay to collect that coupon rate (in this case 0.125%) plus inflation adjustments going forward. If the real yield to maturity is negative, you are paying a premium of xx% over par value. That IS NOT principal and it won’t grow with inflation. It was the cost of getting that 0.125% coupon + future inflation.
      4) However … the price you paid was the market value of that TIPS. You could turn around the next day and sell it for about the same value, usually. The “market value” is not the “principal” value. The principal value is par value + inflation accruals. The market value is par value + inflation accruals x current pricing, which reflects the current real yield to maturity of that TIPS. When the TIPS matures, you get the principal value and as the TIPS gets closer to maturity the principal value and the market value will get closer and closer to equal.

      • Jim G says:

        Suppose he pays a 10% premium or $6,000. If inflation averages 5% per year, total inflation adjustments will add $15,000 to the $60,000 principal that he is paid at maturity, correct?

        • Tipswatch says:

          If you buy $60,000 at par and inflation averages 5% a year, you would end up getting about $76,575 back at maturity, with compounding, along with the 0.125% annual coupon, or about $75 a year.

  7. Rob says:

    Thank you as always for your timely information on federal securities.

    My experiences with TIPS in the past were not the best. For one, I don’t think I fully understand how they work. Also, when I owned TIPS I did not like paying taxes on unrealized gains. The tax code in principle usually avoids the assessment of taxes on unrealized profits but makes an exception with TIPS. Just the tax headaches with TIPS is enough to steer me away from them.

    However, I do find the interest rates on the 2 to 5 year notes interesting. I haven’t purchased any in some time and my portfolio is dwindling, but I think I am going to start adding some 2 year notes.


    • Tipswatch says:

      I don’t find the tax treatment of TIPS onerous because it is exactly like owning a bond fund in a taxable account and reinvesting the dividends. Those dividends are taxable in the current year, even though you didn’t withdraw them. But … what is onerous is the lousy way TreasuryDirect issues 1099 statements that could be called primitive and it would be a compliment.

      Nevertheless, I am trying to make all future TIPS purchase in a tax-deferred brokerage account.

  8. Glenda says:

    I loved how you covered all the bases on what happens when you purchase TIPS above par at auction. Before the “Great Recession”, this sort of stuff was considered to be just a theoretical possibility. Now, it’s definitely something that you have to take into consideration.

    The FED is going to have to do something to retain any sort of credibility. With inflation approaching 10%, they pretty much have to do something drastic. Once the inflation rate went higher than the unemployment rate, the FED should have started backpeddling on stimuls.

    This time around the stock market is set for a long overdue correction no matter what the FED does. If they raise rates, it’ll get clobbered. If inflation goes on unabated, it’ll get clobbered. The original inflation was due to the handling of the pandemic.

    That was something the FED could have done something about last year, but chose not to. Now, the Ukraine war is driving inflation. That’s something that no one except Putin is going to have the means to control. Even if Putin stopped the war, the damage has already been done.

    That being said, I’m curious what your take is on the June reissue of the April 5 year TIPS is. Up until recently, I figured that the October or December auctions were going to be my best shot at picking-up some TIPS at auction above par. Now, it looks like it may be possible June.

    So what are the gotchas for purchasing TIPS on a reissue versus that of an original issue? I’ve got to admit that the valuations of TIPS drives me a little nuts. That and the fact that the paltry interest received on bonds these days isn’t even enough to cover the RMD if it’s in a retirement account.

    Finally, Fidelity has some 5 year CD’s that are at 3%. With inflation approaching 10% and a good possibility that the FED will raise rate by 1% by the end of the year, 3% is still pretty paltry. That’s why I’m hoping that the June reissue breaks par.

    I’m in my 70’s now and the only financial goal I have is to try to break even with inflation. Once TIPS start selling at or below par, it’s pretty much the only game in town right now. That and iBonds. But we’ve already bought our allotment of those for 2022.

    • Tipswatch says:

      I don’t think there are any negatives from purchasing TIPS at reopening auctions. You know the coupon rate and you can track the current price of the TIPS on the secondary market, on Bloomberg’s Current Yields page. In the last Fed tightening cycle, it consistently raised short-term interest rates a couple days before the December 5-year TIPS reopening. Those tended to be very attractive.

      My guess is that if the Fed stays committed and actually reduces its balance sheet, we are probably a bit less than halfway up the climb in real yields. The 5-year real yield started the year at -1.58%, we are now at -0.54%, and should eventually hit at least 0.50%. But there are so many uncertainties, so I like the idea of nibbling into TIPS, not diving in.

      If you are holding TIPS in a retirement account, I suggest keeping some allocation in more liquid assets (like maybe a total bond fund) for paying the RMDs. Individual TIPS don’t work well for that.

      • Glenda says:

        As far as funding the RMD’s for individual TIPS, held at a brokerate firm in an IRA account, I’ll be able to pay the TIPS RMD from my IRA CD’s at several credit unions. These credit unions allow members to take the RMD’s for all of your IRA accounts, regardless of the institution that they are in. Usually, I take the entire RMD from whatever institution is paying the lowest interest rate. Try and get a bank to allow you to do that without incurring a penalty!

        Thanks for the reply.

  9. Lorax says:

    Thank you David for the thorough and helpful information. Is it reasonable to say that even in the worst case, regardless of any change in real yields, the 5 year TIPS at these rates, as long as held to maturity, would at least not lose actual principal if inflation runs at least at 0.54% average over 5 years because the principal adjustment from that amount inflation + .125% interest would restore the original price premium of 103.7,?

    And if there were deflation, if the bond were held to maturity, the maximum principle loss would be limited to roughly 3% total (instead of 3.7% after accounting for the 0.125% interest)?

    Lastly, if the fed loses his nerve and starts easing again and real yields start crashing again, does that mean trying to sell the bond before maturity on the open market could mean a much greater loss of principal? Or maybe the opposite?

    thank you!

    • Tipswatch says:

      Yes, inflation just has to average 0.54% a year and you will get your full par value returned, plus the premium you paid. The lowest 5-year inflation has ever averaged for a 5-year period since 1971 is 1.4% for periods ending in 2016 and 2017.

      If the Fed loses its nerve (this happens fairly often) and sends real yields plummeting, your TIPS will rise in market value. You could sell it at a profit, or continue to hold it to maturity and get par value + inflation and collect 0.125% a year along the way.

      • lorax says:

        Thank you. Also lets imagine tomorrow the 5 year tips bond is at -0.5% and sells at a price of about 103 with an coupon rate of 0.125. Then if before the June reopening, lets say yields have risen to +0.5%. Does that mean the coupon for reopening TIPS would still be 0.125%, but now the price would drop dramatically and equal = original 103 + (plus) adjusted price after 2 months inflation -(minus) price reduction from increased yield, which will be especially pronounced because the coupon stays at 0.125, and even possibly mean the new price for par could come at a discount of less than par = 100?

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