By David Enna, Tipswatch.com
Back in early November I worked with financial adviser (and overall economic guru) Allan Roth on an article he was writing for AARP. The topic: How surging real yields of Treasury Inflation-Protected Securities now made these investments more attractive than Series I Savings Bonds.
A month later, on Nov. 28, the article went live on the AAAP site, with the headline: “Today’s Best Inflation Buster: Treasury Inflation-Protected Securities“. Here is Roth’s main conclusion:
While the I Bond bought today gives you a 0.4 percent rate above inflation, that five-year TIPS mentioned earlier yields inflation plus 1.625 percent. That’s 1.23 percentage points in yield more than an I Bond. I … think TIPS are generally superior to I Bonds right now, since they provide a greater yield. But that could change at some point.
As Roth noted, “That could change.” And yes, things have changed in the short time since that article was published. The 5-year TIPS yield dropped as low as 1.16% on Dec. 2, a substantial decline from the 1.63% just a few days earlier in November. In recent days, the 5-year real yield has rebounded, closing Friday at 1.45%, based on Treasury estimates.
Yeah, we all had dreams of TIPS yielding 2.0%+ above inflation, but that doesn’t look likely anytime soon. (It still could happen, based on recent market volatility. One bad inflation report and … watch out.)
I believe TIPS yields remain attractive, while not spectacular, at these current levels. And there is no way to know how long this phase of high real yields will continue. If the U.S. economy goes sour, and inflation begins to wane, the Federal Reserve could again move to stimulate the economy. The result could be deeply lower yields.
Back on Nov. 20 when I wrote my article on I Bonds vs. TIPS I noted a “sense of urgency” in TIPS investing. Grab the good yields while they last. And I am still a buyer of TIPS at these yields.
Here is a chart of 5-, 10- and 30-year real yields over the last two years. Notice how yields began flattening when the Treasury began tightening in mid-2022. This is a typical reaction to tightening, as the market begins anticipating a slower economy, or possible recession. And even though real yields have declined a bit in the last month, they remain substantially higher than the market over the last decade.
January 2021 through March 2022 was an awful time to invest in TIPS, with yields substantially negative to inflation. December 2022 looks much more attractive in comparison.
It’s almost shocking to look at how TIPS yields have surged higher in just four months. Here is a chart showing TIPS and Treasury yields for 5- and 10-year terms, and the resulting inflation breakeven rates. As TIPS yields have been moving higher since August, the inflation breakeven rate has been declining. In other words, TIPS are now “on sale” versus similar nominal Treasurys. That’s a positive factor for TIPS investors. Here’s the chart:
Real yields have softened a bit from their highs in early November, triggered primarily by two “milder than expected” inflation reports, combined with vague pivot language from the Federal Reserve. But we can be certain that the Fed will raise short-term interest rates by 50 basis points at its meeting Dec. 13-14. A week later, on Dec. 22, the Treasury will auction a reopened 5-year TIPS.
If real yields hold at the current level of about 1.45%, I’d be a buyer of that 5-year TIPS, even though I’m loaded with 2027 maturities. I’d also be very likely to buy the new 10-year TIPS to be auctioned in January, filling a 2033 spot on my TIPS ladder.
That’s my plan. I’d love even higher yields, but I’ll take what I can get at this point in the tightening cycle. Remember, do your own research before investing.
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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.