By David Enna, Tipswatch.com
Last week I was doing quite a bit of research on Treasury Inflation-Protected Securities that mature from 2040 to 2045, years that “should be” near the end of my life expectancy. That resulted in an article I posted Thursday: “Looking to invest in longer-term TIPS? There’s a problem.”
Writing that article ended up being similar to volunteering at a cat & dog shelter. I found myself wanting to bring all the puppies and kitties home. Here are the six potential investment options, with prices and yields as of Wednesday afternoon:
As I noted in the article, I carry a bias — possibly overblown — against buying high inflation accruals at a premium price. So that ruled out the TIPS maturing in 2040 and 2041, both with high inflation indexes and higher-than-market coupon rates. Those two looked too pricey.
But the more I thought about it, the rest of the bunch (maturing in 2042 to 2045) looked fine, with attractive real yields and relatively high inflation accruals balanced off by below-market coupon rates. I especially liked CUSIP 912810QV3, maturing in February 2042, because it would fill a rung in my TIPS ladder between 2041 and 2043.
I hunted around Friday and noticed the real yield on CUSIP 912810QV3 had increased slightly, to 1.717% on a $10,000 purchase. So I pulled the trigger.
I know that these secondary market TIPS purchases can be confusing — balancing so many factors of cost and inflation accruals — so I’ve created a summary of that investment:
I bought $10,000 in par value of this TIPS, but because of the inflation factor of 1.33494 I was actually purchasing $13,349.40 of principal. The price was 84.57 for $100 of value, so the cost of the investment was $11,289.59.
In other words, I paid $11,289.59 for $13,349.40 of principal. The accrued interest of $27.70 will be repaid to me at the Aug. 15 coupon payment.
At this point, I have $13,349.40 earning annual interest of 0.750%. The principal total will continue climbing with inflation until maturity on Feb. 15, 2042.
With this investment, I am guaranteed to receive the $10,000 par value at maturity, even if we hit 19 years of deflation. That means $1,289.59 of my original investment is at risk if severe and extended deflation strikes. I am OK with that. The risk is extremely small. And the risk is counter-balanced by the 0.750% annual interest I will collect along the way.
What’s coming up
The June 22 reopening auction of CUSIP 91282CGW5 — creating a 4-year, 10-month TIPS — is starting to look interesting. That TIPS got a real yield of 1.32% at the originating auction on April 20, setting its coupon rate at 1.25%. As of Friday’s market close it was trading with real yield of 1.78%, up 46 basis points in just over a month.
Things can change before the June 22 auction, of course, but remember that this TIPS trades on the secondary market and could be purchased at any time along the way, if you see a real yield you find attractive. It’s inflation index is just 1.005 and the price is discounted at about 97.56.
• Confused by TIPS? Read my Q&A on TIPS
• TIPS in depth: Understand the language
• TIPS on the secondary market: Things to consider
• Upcoming schedule of TIPS auctions
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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. Please stay on topic and avoid political tirades.
David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They 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 
Question, on the Treasury Direct site when looking at TIPS auctions, what is a re-opening? For example I purchased the 5 year TIPS auctioned on 4/20/23 and it looks like its again available on 6/22/23. Is that still a new issue? or exactly what is it?
For TIPS, the Treasury stages either an opening or reopening auction each month, according to this schedule:
January. New 10-year TIPS.
February. New 30-year TIPS.
March. Reopening of January 10-year.
April. New 5-year TIPS.
May. Reopening of January 10-year.
June. Reopening of April 5-year.
July. New 10-year TIPS.
August. Reopening of February’s 30-year.
September. Reopening of July 10-year.
October. New 5-year TIPS.
November. Reopening of July 10-year.
December. Reopening of October 5-year.
The opening auction sets the coupon rate of the TIPS just below the auctioned high real yield and in most cases the inflation index will be close to 1.0000. The reopening auctions are for the same TIPS, with the already set coupon rate, and an inflation index that has risen or fallen with inflation since the time of the originating auction.
Is there really much of a difference or reason to shy away from a reopening? No. For example, that 5-year TIPS reopening in June is likely to have a better real yield than the originating auction, so it will be attractive.
The Cleveland FED is forecasting a 1.9% inflation for May. How might that affect the yield of Cusip 91282CGW5 the 4 yr.10 mon. TIPS auctioning only 2 days after the inflation numbers for May Come out?
Actually, the Cleveland Fed is forecasting 0.19% inflation for May and an annual rate of 4.12%. That would be positive news, but these Cleveland Fed forecasts haven’t been highly accurate. It also sees core inflation increasing 0.45% for the month and 5.34% year over year. That would be negative news. But view this for what it is … a forecast. The Federal Reserve will also be meeting June 13-14 and will make a decision on a possible rate increase. (The CPI number comes on on June 13.) So a lot could influence yields between now and June 22.
Very sorry about the 1.9% That, of course, was a typo but good you caught it.
To echo what Jim said above, inflation provides a windfall to those who hold nominal debt, and deflation provides a windfall to those who hold nominal assets. The “deflation risk” in buying older TIPS bonds is only the risk of losing that windfall. There is no risk of losing principal in real dollar terms.
David, thanks very much for both of your posts, which offer a road map for making my decision on buying LT TIPS. I actually pulled the trigger a few weeks ago, buying one of the bonds in your table. With hindsight, I wish I’d waited as yields have risen since then. But in the grand scheme of things I got a positive real yield well above 1% so I’m very happy with that.
Which brings me to my next question: are you really buying only $10,000 in TIPS? It seems to me if TIPS yields are good you should use that opportunity to lock in as much as possible. I’ve pretty much filled out my TIPS ladders in the last 6 months.
The question of what quantity of TIPS to buy brings up the same risk conundrum I referenced before. If you go all-in on a given date, you run the risk of locking in rates at an inopportune time. Buying in “drips and drabs” spreads out this risk, but opens the possibility of missing the high yield TIPS window altogether.
To me, the risk of missing the TIPS positive real yield window outweighs the FOMO risk of waiting and hoping for higher real rates. I’m happy to lock in “good enough” rates even if they might go higher later.
Yes, in this case it was $10,000. I will add to that longer-term position if I see the opportunity. Of course, I have a lot of investments in TIPS and I Bonds and I don’t have a pressing need to ramp up those investments in one big purchase.
David, Thanks for the info, but I don’t understand how this investment (CUSIP 912810QV3) will give you a real yield to maturity of 1.71%. According to your post, at this point you have $13,349.40 earning annual interest of 0.750%. That gives a total annual interest payment of $100.12. Since your total cost was $11,317.29, that works out to a yield of 0.885%. I know the principle increases at the rate of inflation, so at first glance it seems to me that you will be getting 0.885% above the rate of inflation, not 1.71%, but that can’t be right. So, for simplicity, if inflation stays at 2% per year for the entire duration of the bond, could you explain how this investment will give you a real yield of 1.71% (nominal yield of 3.71%) for the duration of the bond? Or do you just accept that on faith? Thanks.
I bought the $13,349 of principal at a discount of 18.245%. That works out to an average annualized return of about 0.97% until maturity. Add the coupon rate of 0.75% and you get to 1.72% yield above inflation. Rough estimate.
Thanks, I knew there was something I was missing, but couldn’t figure out what it was. Glad it was easier to explain than I expected.
Why would you have a bias against high inflation factors? Unless you expect DEFLATION (which seems incredibly unlikely) the YTM should be the determining factor.
My prejudice – which I would love to see modeled -is that if inflation stays moderately high (e.g. 3%) then the higher coupon TIPS will do better.
I suspect that the higher YTM on the lower coupon bonds reflects that risk, but can’t prove it.
In general, when you look at TIPS maturing on the same day of the same year, the one with the higher inflation index gets a slightly higher market yield because of the slight risk of deflation. I do think it all balances out. More here: https://tipswatch.com/2023/02/05/tips-on-the-secondary-market-things-to-consider/
Like our hero, I do not purchase TIPS with high inflation factors. This is a risk management technique rather than a market call of expecting deflation.
In portfolio risk management, a basic rule is “Control what you can control and mitigate what you cannot.” Deflation risk is something the investor can control and remove from the equation by only purchasing individual TIPS at 100 or less. This is more like buying insurance rather than trying to eke the last basis point out of a bond trade.
It reflects a Safety-First mindset. The Total Return side will make other choices based more on, well, total returns. One is not better than the other; it’s just a personal option.
Thanks T Lee, that’s a very succinct and logical explanation.
The Treasury could really help us out in risk management by issuing one 20-year TIPS each year, replacing the one 30-year reopening auction in August. Having a new 20-year TIPS would allow investors to get that term at very close to par value.
Fidelity typically has minimums of 75k to 100k on most of their secondary TIPS. Does Vanguard offer the same TIPS at lower minimums?
I was able to get the $10,000 purchase through Vanguard on Friday, and right now I am looking at Fidelity and I am seeing TIPS with $1,000 and $10,000 minimum purchases (with lower real yields, of course). But no trading in secondary bond market orders is allowed when the market is closed.
I’m also on Fidelity right now and was trying to figure out why I couldn’t see the minimums you mentioned. Then I noticed the ‘depth of book’ icon which I just realized has the options for lower minimums. Thanks for your prompt feedback and for all the great TIPS info you provide!
For Vanguard, click on Show More in the CUSIP column while the market is open to see other minimums. Not as intuitive as Fidelity.
I agree 100 % on this. There’s always the possibility of higher rates but locking this in could forestall a lot of regret down the road.
And if 20-year real yields continue rising, I will happily buy more.
You are absolutely right that your latest TIPs purchase has a risk of a nominal loss of $1,289.59 if extended deflation occurs. The thought of that nominal risk prevented me, for many years, from buying TIPs with inflation accruals. However, it has no risk of a real loss even if extended deflation occurs and that is the purpose of a TIPs purchase. It is a tough mental shift to think about your investments returns solely in a real sense and thus ignore nominal values. But you can’t eat nominal returns, only real ones.
I wanted to buy the April 2028 at Vanguard last week but the minimum was $100k. Settled for the October 2027 @ 1.75% real yield. Fidelity’s minimum on the April 2028 was a more reasonable $10k.
These minimums seem to change every day. I agree they are very annoying. Fidelity’s bond platform and information is much better than Vanguard’s, but my purchasing account is at Vanguard. Fidelity can be a great source of information before a purchase.