I won’t say ‘yes,’ but TIPS in general look attractive for the first time in several years.
By David Enna, Tipswatch.com
For many years, I’ve been tracking the price of the iShares TIP ETF, which holds the full array of TIPS maturities. Over that time, I’ve noticed something odd: The ETF’s net asset value consistently bounces higher after dipping below $110.
I have no investments in TIP and my favored fund of this type is Schwab’s U.S. TIPS ETF, which has a lower expense ratio. But TIP is the biggest and most-watched fund investing in Treasury Inflation-Protected Securities, so I use it as a proxy for the market.
I’ve thrown this $110 theory out there many times in the past, including this article I wrote on November 6, 2015, with exactly the same headline. On that day, the TIP ETF closed at $109.87, very close to Friday’s close of $109.70. The ETF also broke through the $110 barrier on March 20, 2020, a day of chaos throughout the stock and bond markets.
Here is a chart tracking the net asset value of the TIP ETF going back to January 2011, the first year of aggressive Federal Reserve intervention in the Treasury market:
Does this look like a coincidence or some kind of true price resistance? My theory is that each of these dips reflects a rise in real yields to attractive levels, but in almost every case since 2011, the Federal Reserve eventually stepped in to lower Treasury yields, and in turn to increase the NAV value of the TIP ETF.
Back in November 2015, when I noted the $110 milestone, this was the state of the TIPS market:
- A 5-year TIPS had a real yield of 0.42%.
- A 10-year TIPS, 0.71%.
- A 30-year TIPS, 1.27%.
And this is the situation at today’s market close on (Sept. 16, 2022):
- A 5-year TIPS has a real yield of 1.13%
- A 10-year TIPS, 1.07%
- a 30-year TIPS, 1.25%.
When was the last time real yields were this high? Back on Nov. 27, 2018, when the 5-year real yield reached 1.16%; the 10-year, 1.15%; and the 30-year 1.34%. And … it just so happens that the TIP ETF closed at $108.48 on that day. One year later, the TIP ETF closed at $116.65. Two years later it was at $126.28.
What’s the point?
The bond market is a very scary thing in September 2022 and I’m not going to argue that anyone should be pouring money into TIPS mutual funds or ETFs. But I will argue that TIPS in general — along with these funds — are much more attractive today than they were six months ago, when the 10-year TIPS was yielding -1.04% and the TIP ETF was trading at $122.46.
I have been nibbling into TIPS since May with small purchases at auctions, reallocating money from SCHP to individual TIPS. I think it is time to start taking some bigger bites, starting with next week’s 10-year TIPS reopening auction. I’ll be posting a preview of that auction on Sunday.
Keep in mind that these are my investments and my opinions. I am a journalist, not a financial adviser.
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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 be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
Treasury Inflation-Protected Securities 
The LTPZ fund is down even more. Is that attractive? Just curious.
That fund is high-risk, high-reward. Its total return is down 34.3% this year, after rising 17.5% in 2019, 24.9% in 2020 and 7% in 2021. If the Fed actually pivots to another phase of quantitative easing, it could be very attractive. Not my style, though.
I would like to understand how people treat their taxes on TIPs. The US Treasury when they issue the ANNUAL tax slips only include the nominal interest (i.e. the amount actually paid out in cash each year and do not provide a slip for the inflation “interest” added to the principal during the year). At the end of the term of the TIP the US Treasury issues 1 additional slip that includes all of the cumulative inflation interest that was added to the TIP during its term. The difference between the slips is subtle: the regular annual slip has Income Code 01 in Box 1 of the slip – the slip with cumulative inflation interest at the end of the term has Income Code 30 in Box 1 of the slip.
I am assuming that ETF managers calculate both the nominal and the inflation interest and issue tax slips for those amounts (I have never held an ETF so I can’t speak from experience).
I have held TIPS both directly (Treasury Direct) and through a brokerage account. When held in a brokerage account, the tax information I get from the broker only includes the information on the annual slip provided by US Treasury (i.e. the broker does not calculate the “inflation interest added on January 15, and July 15). I wonder what those who directly hold their TIPs do since they can’t rely on the slips issued by the US Treasury for the full story. Personaly, I go through the process of reviewing the TIPs inflation spreadsheets published by US Treasury and calculating the inflation interest myself each year.
If other direct TIP holders don’t do this then they are underreporting their taxable income and could face a big surprise (and penalties) down the road? What do you do for tax calculation on your TIPs held directly?
On the tax treatment: TreasuryDirect issues a 1099-INT for the coupon payments for the year and a 1099-OID for the inflation accruals during the year, which are also taxable that year. You need to make sure to download both forms, each year. More on this: https://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_tax.htm
For TIPS funds, the inflation accruals are generally paid out each month, and these are taxed as interest through a 1099-INT issued by the broker.
Does it make more sense to buy the TIP ETF or to buy a 5Yr TIP through treasury direct ??
I personally prefer to buy an individual TIP and hold it to maturity. Since I retired, I have been buying individual TIPS at auction in a traditional retirement brokerage account, which makes it easy to transfer money with no tax consequences.
wow – the TIP ETF is very attractive. Thank you for flagging this + all of the wonderful knowledge you share in general!!
Hi David. I just found your site & am enjoying reading through everything. Do you have any thoughts on buying I-Bonds vs. 5 year tips. I need that money in 5 years for tuition. Is one better than the other?
Thanks for yet another excellent post!
You’re probably aware of this but there’s a now pretty epic-length thread on TIPS vs. nominals right now on Bogleheads. I find the OP’s argument compelling (and so do most if not all of the subsequent posters). Scary times for bonds indeed but VTIP or TBills do indeed look like “the best horse at the glue factory” as one witty writer characterizes Treasury bonds in general.
https://www.bogleheads.org/forum/viewtopic.php?p=6799004#p6799004
I have dipped into that discussion, which is … well, esoteric, like so much on Bogleheads. I always hold TIPS to maturity and only buy TIPS I can hold to maturity. And that is why I prefer individual TIPS to TIPS funds, which obviously suffer from volatility. (But I do have VTIP in a traditional retirement account, and a small stake in SCHP.) I also am perfectly willing to buy a nominal 5-year Treasury yielding 4%. I’m waiting. It could happen. Meanwhile, my shorter-term cash is stashed in 13- and 26-week T-bills.
That makes sense! Thank you very much for your blog and all you have done and continue to do to educate all of us about TIPS, iBonds and bonds in general. You have the rare ability to clearly explain these sometimes-esoteric investments in a clear and concise way.