By David Enna, Tipswatch.com
On July 15, an ugly-duckling 10-year Treasury Inflation-Protected Security matured. It was CUSIP 912828WU0, first auctioned on July 24, 2014.
I call it an ugly-duckling because the auctioned real yield was 0.249%, setting its coupon rate at just 0.125%, the lowest the Treasury will go for any TIPS. In addition, on auction day it got a inflation breakeven rate of 2.26%, rather high at a time when U.S. inflation was hovering around 2.0%.
In my preview article on this auction, I wasn’t a huge fan:
It’s possible that this new TIPS will auction with the lowest yield to maturity for any 9-to 10-year TIPS since May 2013, when the yield was -0.225%. Since then – for six consecutive auctions – the lowest yield to maturity has been 0.339%.
Nevertheless, CUSIP 912828WU0 turned out to be a fine investment, at least compared with a nominal 10-year Treasury note, which was yielding 2.51% on the day of the auction. Inflation over the next 10 years ended up averaging 2.8%, making this TIPS a better investment by a wide margin with an annual advantage of 0.538% in yield over the 10 years.
Data from Eyebonds.Info show this TIPS produced an annualized nominal yield of 3.048% over the 10 years, much higher than the 10-year note’s 2.51%.
I didn’t buy this TIPS at that auction, but I jumped aboard on the Sept. 18, 2014, reopening auction, when the real yield rose to a more attractive 0.610%. On that day, the 10-year Treasury note had a nominal yield of 2.63%, creating a breakeven rate of 2.02%. The September purchase was also a winner, with a nominal return of 3.445%:
TIPS versus an I Bond
If you purchased an I Bond in July 2014, it had a fixed rate of 0.10%, below the real yield of 0.249% for the TIPS at the original auction. That I Bond has produced a nominal return of about 2.94% according to Eyebonds.info. So the TIPS is the winner, but not by a great margin. The I Bond benefits from better compounding, since all interest payments are added to principal until redemption.
Thoughts
TIPS have been on a winning streak for several years, caused by the surge to 40-year high inflation that peaked in June 2022 at 9.1%. Even today, annual inflation is running higher than the auctioned breakeven rates of 2014. And so TIPS have been the winners versus nominal Treasurys, at least recently.
Notes and qualifications
My chart is an estimate of performance comparing inflation breakeven rates versus actual inflation.
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.
• Now is an ideal time to build a TIPS ladder
• Confused by TIPS? Read my Q&A on TIPS
• TIPS in depth: Understand the language
• TIPS on the secondary market: Things to consider
• TIPS investor: Don’t over-think the threat of deflation
• Upcoming schedule of TIPS auctions
* * *
Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).
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 
Thanks for all the useful content on this blog. It has given me the confidence to purchase I bonds, and I’m about to purchase my first TIPs. Currently there is a TIP maturing on January 15, 2025 (CUSIP 91282845) with a YTM of 4.984%. It seems very high with nominals yielding a little over 5%. Why is it so high? Do you think this will be a good investment?
My sense is that buying a TIPS so close to its maturity as CUSIP 912828H45 is not really going to give you a true sense of what a TIPS is and does. So it may not be a good choice for a first purchase. Maybe try picking up one at a Treasury auction opening or reopening of longer duration instead of relying on the secondary market first time around. If you are timid about it as a first timer, maybe just take a relatively small bite. Treasury Direct lets you buy as little as $100 face value. Most brokerage accounts seem to set the bottom at $1000.
To answer your question a tiny bit more directly, I suspect that the difference in performance between that TIPS and a 26 week nominal T-Bill come January 15th will be pretty slight.
I thought a TIPS closer to maturity would fluctuate less and be more likely to pay its current yield to maturity. I guess I still have a lot to learn.
PaulR, excellent answer. These very short-term TIPS usually line up with T-bill yields. You might do better, but not a sure thing.
A nominal note (91282CDS7) maturing on January 15 has a YTM of 5.041. The TIPS (912828H45) has a YTM of 5.038. Does that mean if inflation is 0.003% or higher the TIPS will be the better investment? It looks like a steal to me. Am I missing something? Isn’t CPI over 2%? Is the seasonal adjustment going to be -2%?
Could be. Come mid-December, when the November CPI report comes out, you will know for certain which one is the winner. Until then you are attempting to predict the future. Buying the last 5-1/2 months of that 3 year nominal is pretty close to a sure thing, barring the US government reneging. Buying the last 5-1/2 months of that 10 year TIPS includes nearly 1/4 of the principal value you purchase as inflation accrual that may grow or may shrink between now and January 15th. Whether you are comfortable with that is up to you.
Ben and everyone, if I have time I will try to write about this Jan 2025 TIPS for Sunday. Flying home from Munich on Friday. This issue comes up every year and it is complex. I need time to take a look.
Sorry, if this is off topic. Would love to see a post from you about TIPS cost basis. It took me years to get used to cost basis being constantly adjusted – seems like some tax rule related process. Still find it hard to think about what brokerage shows as “loss” or “gain” compared to periodically adjusted cost basis. Wouldn’t keeping cost basis constant at the actual price that TIPS was bought at make things easier?
Thank you for keeping this website up.
amChess, I think you are referring to what is known as “mark to market”. Here is a good definition.
Mark to market is an accounting practice that involves adjusting the value of an asset to reflect its value as determined by current market conditions. The market value is determined based on what a company would get for the asset if it was sold at that point in time.
With a fixed income asset (an individually owned bond or CD), this only becomes an issue if you sell it before it comes due. If you let it mature, you will receive the full principal.
Hope this helps.
If your TIPS is in a tax-deferred account, cost basis doesn’t really matter, except for psychological reactions. In a taxable account, the cost basis needs to reflect the inflation accruals, since you are taxed on that in the current year.
Fantastic and timely perspective, showing that TIPS are exactly what we know of them: insurance against “unexpected” (however that is defined) inflation relative to nominal Treasuries. Your charts are always great at showing what the cost is for such insurance. And, related, a nice illustration of the “asymmetric risk” that inflation poses. Thanks for taking the time to post during your travels.