Markets remain overly optimistic about future inflation.
By David Enna, Tipswatch.com
The U.S. Treasury on Thursday will offer at auction $8 billion in a reopened 30-year Treasury Inflation-Protected Security, CUSIP 912810TY4. While most small-scale investors will shy away from this offering, one factor makes it interesting: a potentially low inflation breakeven rate.
The result will be a 29-year, 6-month TIPS. The coupon rate was set at 2.125% by the originating auction on Feb. 23, 2024, when investors in CUSIP 912810TY4 got a real yield to maturity of 2.20%, the highest in 14 years.
Since then, 30-year real yields have declined a bit. This TIPS trades on the secondary market, and on Friday it closed with a real yield to maturity of 2.06%, a bit below the coupon rate. It was trading at a premium price of 101.54.
Definition: The “real yield” of a TIPS is its yield above or below official future U.S. inflation, over the term of the TIPS. So a real yield of 2.06% means an investment in this TIPS will provide a return that exceeds U.S. inflation by 2.06% for 29 years, 6 months.
A 30-year Treasury of any kind is likely to be a highly volatile investment. Even small swings in market yields can send market value soaring up, or down. Here is the trend in the 30-year real yield over the last 4 1/2 years:
A 30-year real yield above 2.0% is attractive compared with trends over the last 14 years, and before that the Treasury did not offer 30-year TIPS from October 2001 to February 2010. In the late 1990s, auctioned 30-year real yields ran as high as 4.128%.
So … is 2.0%+ a “normal” or “attractive” 30-year real yield? I would say yes.
Inflation breakeven rate
The Treasury’s yield estimate for a 30-year nominal Treasury bond closed Friday at 4.15%. If you compare that to CUSIP 912810TY4’s real yield of 2.06%, you get a 30-year inflation breakeven rate of just 2.09%, a low number given current inflation trends. This means the TIPS will out-perform a nominal Treasury if inflation averages more than 2.09% over the next 29 years, 6 months.
Things will change before Thursday’s auction, but I’d say investors are underestimating future U.S. inflation. You could say, “But the Federal Reserve wants to keep inflation at 2.0%.” Sure, but that has been the Fed’s goal for more than a dozen years. Since that goal was set, annual inflation has been low (0.7% in 2015) and high ( 7.0% in 2021), but has averaged an annual rate of 2.6%.
Here is a chart showing 30-year average inflation rates going back to periods beginning in 1971. Not one 30-year period has had an inflation rate below 2.20.%
A low inflation breakeven rate does not guarantee that a TIPS will be a good long-term investment, but it does indicate it will likely out-perform a 30-year nominal Treasury.
We’ve seen very low 30-year breakeven rates at auctions in recent years, as low as 1.52% for a 30-year TIPS originating auction in February 2016. That particular TIPS has been a dud (it’s currently trading with a price of about 81.65). But with its auctioned real yield of 1.120% it is definitely out-performing a 30-year bond from February 2016, with a nominal yield of just 2.64%.
Here is the trend in the 30-year inflation breakeven rate over the last 4 1/2 years, showing the recent dip lower:
Pricing
CUSIP 912810TY4 closed Friday on the secondary market with a price of 101.54. You can track that in real time on Bloomberg’s U.S. Yields page. On the settlement date of Aug. 30 it will have an inflation index of 1.02367. So investors will be buying about 2.4% additional principal at a slightly premium price. Here is how a $10,000 par investment could look:
- Par value purchase: $10,000
- Actual principal purchased: $10,000 x 1.02367 = $10,236.70
- Cost of investment: $10,236.70 x 1.0154 = $10,395.35
- + Accrued interest: About $8.87
In summary, an investor purchasing $10,000 par value of this TIPS could pay about $10,395 for $10,237 in principal and then earn a coupon rate of 2.125% + inflation accruals over the next 29 years, 6 month. All of this will change by Thursday’s auction, but this provides a rough estimate.
Final thoughts
A low inflation breakeven rate doesn’t guarantee a top-notch TIPS investment. What a 30-year TIPS investor would like to see is: 1) a historically strong real yield to maturity, and 2) a historically low inflation breakeven rate. So this TIPS qualifies for anyone willing to venture into 30-year volatility.
I won’t be a buyer because the 30-year term falls outside my likely lifespan (I would be 100 years old in February 2054) and my style of TIPS investing is buy-and-hold to maturity. It could be a candidate for the top-end of a TIPS ladder for a younger investor. And because of its potential volatility TIPS traders may want to jump aboard.
I’d expect continued volatility in real yields in the days leading up to Thursday’s auction, so any investor should keep an eye on the Bloomberg U.S. Yields page. And of course this TIPS could be purchased at any time on the secondary market, if you see a yield you like.
This TIPS auction closes Thursday at 1 p.m. ET. Non-competitive bids at TreasuryDirect must be placed by noon Thursday. If you are putting an order in through a brokerage, make sure to place your order Wednesday or very early Thursday, because brokers cut off auction orders before the noon deadline.
I plan on posting the results after the auction’s close. Meanwhile, here is a history of recent 29- to 30-year TIPS auctions. Notice that just three years ago the auctioned real yield was -0.292%, the lowest in history for this term:
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• 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
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Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).
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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 
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Thanks for another informative article. The Oct 15, 2024 TIPS has a yield of 4.397. Isn’t that high considering it doesn’t include the low CPI year-end months?
That particular TIPS has only one more half-month of inflation adjustments remaining. On Sept. 30 its inflation index will be 1.22592. So at this point you are looking only a very small inflation adjustment and a final coupon payment of only 0.0625%. That yield is exaggerated by the very short term remaining, but in actuality it is priced like a 4-week Treasury.
David,
When I look at your table of 30-year TIPS over half are less than 1% real yield.
I believe I can still get the 30-year ibond with a fixed rate of 1.3%, so would not that be similar to a 30-year TIPS with a 1.3% real yield and certainly less volatile, so could be held by anyone, since it is going to give you pretty much a constant 1.3% real yield with no volatility (no negative principal swings)?
The real yields you see listed at the end of the article are for the original auctions, but today all those TIPS have market real yields about 2.0%. You can see those listed here at market close each day: https://www.wsj.com/market-data/bonds/tips
So the gap between the current I Bond (1.3%) and current 30-year TIPS (2.0%) is about 70 basis points. That is fairly normal. I Bonds have no market risk and earn tax-deferred income.
David,
I think the “market risk” is worth a lot more than 70 basis points, at least in my opinion.
Think of the person who bought the $.125 coupon TIPS in Aug of 22, and the person who bought the ibond at the same time with no fixed rate. The TIPS owner can now sell his TIPS for 60 cents on the dollar. The ibond owner loses only 3 months interest, but gained some huge principal increases in 2022 & 2023 if they bought in Aug of 2022.
The above example is one reason not to buy a 30-year TIPS at a significantly below average real yield of less than 1%, as there will be precious few times you can sell it for a gain if you need to.
Personally, I’m not a fan of TIPS at all, especially long-dated ones. If you think about it from a financial planning perspective, the main reason to own bonds is for income in retirement or as liquidity in a bad equity market. Can you really know that you won’t need to sell your 30-year TIPS, even if you buy them when you are 30?
FinancialDave, during those years of very low real yields, I wasn’t buying TIPS (except for a 5-year here or there) and I was warning against the potential disaster of buying a 20- or 30-year TIPS with a real yield near zero. But times have changed and TIPS are now attractive. It is a specialized investment, more complicated than an I Bond. My recommendation for buying TIPS when real yields are attractive is to buy a ladder out to a specific future year and then hold to maturity. As long as the investor can hold, there is no risk except for possible opportunities lost. I Bonds are much more flexible, creating an inflation-protected savings account that can be accessed at any time after a year and after 5 years with no penalty.
It looks like there is a good chance of the FED reducing interest rates by up to 2% by the end of 2025. Long-Term rates are harder to predict, but if you get bonds with a duration of 2 to 5 years, you will likely enjoy some good asset appreciation for a total return of at least 6%.
Based on the Bloomberg listings, the breakeven inflation rate for 5 year TIPS appears to be slightly below 2.0%. Your thoughts, for those of us looking for shorter maturities?
I am a fan of the 5-year TIPS, with a real yield currently around 1.8% and a breakeven of about 1.97%. Over five-year periods, it is common for inflation to average less than 2%. That happened for every five-year period ending from 2014 through 2020, with a low of 1.4% for the five years ending in 2016 and 2017. But that was in a time of extremely low inflation, which we have since departed, it seems.
Very interesting summary of this particular bond. My noob question would be, if you bought these as part of an investment basket, and you probably won’t be around to maturity, what would you do to harvest the income? Say you bought $100k of these and you timed selling some when the market was favorable and you needed some liquidity. Does that make any sense? Makes you subject to market volatility in rates, but as long as you have 10-20 years to liquidate and you have other shorter term sources of liquidity could this be an option for a portion of a portfolio? Thanks.
I’d say in theory this would work, as long as real yields don’t suddenly surge to 3% or higher. If that happens, these TIPS would be under water for a long time. I don’t trade TIPS and my TIPS ladder ends in year 2043, when if lucky I will be alive and 90 years old.
The 5 yr TIPS from this year is doing nicely and I thank you for giving me the courage to pick it up. As politicians invoke better angels, you’re already there.
Is now still a good time to set up a TIPS ladder (as a 20% of nest egg anchor) – by buying them on the secondary market (using the tips ladder website)? Inquiring minds (with pre- and post- tax cash sitting in soon-to-be shrinking interest money markets) want to know!
It isn’t as “great” a time as in October 2023 or as recently as May 2024 to build a TIPS ladder, but real yields are holding up fairly well in the 1.70% to 1.97% range. The yield curve has steepened, so now the longer-term TIPS have higher real yields, which works well if those are the years you are trying to fill.
Thank you for your thoughts! Have you ever thought of having your own Jackson Hole-ish event with like-minded people and fans? I bet there’s more we all could share over tapas than TIPS tips 🙂
4Week TBills have been my “go to” for the past two years. If the Fed starts doing what the street has been screaming for…good strategy for keeping a decent interest rate? Thanks Doug Elza
I’d say the probability is that 4- to 13-week T-bill yields are going to fall 150 basis points over the next year and then stabilize. If the economy stays strong, the decline will be less. So you’d still be looking at 3.8% or so on the T-bills, while inflation (we hope) will be lower. At some point, would you want to stretch out maturities to 3 to 5 years to lock in current rates?
What about this as a possible strategy…convert the 4 week Tbills into 30 year Tbonds since the conventional wisdom is forecasting a significant drop in rates. Looking at your 3.8%, wouldn’t that produce a significant capital gain on $1M invested? Thanks Doug Elza
Doug, it would be an interesting investment strategy to convert $1 million in risk-free T-bills to highly volatile 30-year Treasurys. There is no way to know for sure where interest rates are heading, so a move like that is speculation. It could be highly profitable, or a bust.
Thank you very much for your insight.