By David Enna, Tipswatch.com
Because of a remarkable confluence of events, including last week’s presidential election result, real and nominal yields for U.S. Treasurys have been rising dramatically, up 40 to 50 basis points since October 1.
But this article is not about politics. It is about opportunity.
Just a couple months ago, I was hearing from investors ruing the fact they missed the chance to build a ladder of Treasury Inflation-Protected Securities with yields near 2024 highs. But now that real yields have again surged higher, that door is open again.
Why a TIPS ladder?
Jason Zweig, personal finance columnist for the Wall Street Journal, wrote an article last week titled, “What to Buy if the Election Has You Worrying About Inflation.” I talked with Zweig last week before he posted the article. A lot of our discussion focused on the sometimes unexpected risks of investing in ETFs holding a broad range of TIPS. From the article:
In 2021, TIPS funds returned an average of 5.5%, while a U.S. bond index fund fell 1.7%. Naturally, investors and financial advisers bought TIPS in titanic quantities that year, pouring $42.4 billion into mutual funds and exchange-traded funds that specialize in them, according to Morningstar.
Right on cue, in 2022 the Fed jacked up interest rates and TIPS lost about 12%. Fickle investors fled TIPS funds, yanking out a combined $37.2 billion in 2022 and 2023.
Dumping all this money into and out of TIPS makes no sense.
Zweig then explained the advantages of buying individual TIPS and holding to maturity:
If you buy TIPS directly and hold them to maturity, your future rate of return after inflation is certain, as is the return of your principal. …
“We aren’t mathematical beings, we are emotional animals,” says Allan Roth, a financial planner at Wealth Logic in Colorado Springs, Colo. If you buy TIPS directly, “you know your spending power, what your cash flow is going to buy, in each future period,” he says. “You don’t know that if you buy a TIPS fund. And that makes it easier to stay the course if you own the TIPS directly.”
I am not a fan of broad-based TIPS funds and ETFs, although I have owned them in the past. By the time of the big bond decline of 2022, I had consolidated my TIPS funds holdings into Vanguard’s Short-Term TIPS ETF (VTIP) which ended 2022 with a total return of -2.96%, not devastating. As TIPS real yields started climbing out of negative, I began converting all my VTIP and part of my Total Bond Fund (BND) investments into a ladder of individual TIPS, all in a traditional retirement account.
Roth has been an important advocate for using a ladder of TIPS (at current yields) to create a reliable and totally safe withdrawal rate of 4%+ through a 30-year retirement. And thanks to his urging, the process of filling a TIPS ladder has gotten a lot easier. Just last month, Roth published an article titled, “Four Easy Steps to Build a TIPS Ladder.” He writes:
The world is and always has been risky and it’s feeling riskier than usual. What if stocks have a real and protracted plunge rather than the teddy bears we have had this century? What if all of this government debt causes hyperinflation? Building a TIPS ladder gives us a license to spend and creates a spending floor.
Roth’s article gives step-by-step instructions for creating a model TIPS ladder using the tool at Tipsladder.com. I won’t repeat the steps here, but the result could be an investment list like this — at a cost of $452,656 — for a TIPS ladder running from 2025 to 2054 and providing a safe, inflation-adjusted base income of $20,000 a year, with a safe withdrawal rate of 4.42%.
An opportunity to build, or improve
Here is a chart showing real yields for 5-, 10-, and 30-year TIPS over the last 15 years, showing how TIPS of all maturities are near highs for this 15-year period.
The unique thing about this chart is the alignment of real yields into a much tighter band than we’ve seen historically. And that means that an investor can find attractive real yields for every year of a TIPS ladder. That’s an opportunity.
My personal TIPS ladder was built chaotically, and I have added in some nominal Treasurys and CDs timed to mature in the years 2025 to 2029 to allow me to purchase 10-year TIPS to fill the gap years of 2035 to 2039. Here are my Treasury investments laddered through 2043, with a comparison to the real yields you can find today on the secondary market:
Looking at this list, I’d say I could do better today in some cases than I did building the ladder in late summer/early fall 2023. I am happy with these investments, but will still look for opportunities to add to the ladder. Just last week, for example, I purchased the July 2034 TIPS with a real yield of 2.008%. (That same TIPS will have a reopening auction on November 21.)
Can real yields continue climbing higher? Certainly. But if you can nail down a real yield of 2.0%+ over the long term, you’ll end up fine, with a safe yearly withdrawal rate of 4.4% or more.
My ladder ends in 2043, but if you are building beyond that year, you can find very attractive yields through 2054. The real yield curve has been steepening, meaning you get a better return for a longer maturity. These very-long term TIPS are highly volatile, so you need to invest, forget and hold to maturity. Zweig writes:
Of course, in the bond-market bloodbath of 2022, the prices of individual TIPS fell. So did TIPS funds. Those losses apparently felt much more intense to people who owned TIPS funds than they did to investors who owned the underlying securities directly. That’s probably because direct holders draw comfort from the expectation that they’ll hold the TIPS until maturity. …
If you want to assure yourself of having a known amount of investment income in a specific year, buy TIPS directly. …
I’m buying TIPS. You should, too.
• 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. NOTE: Comment threads can only be three responses deep. If you see that you cannot respond, create a new comment and reference the topic.
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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I see your logic in TIPS ladders, but unless I’m missing something they seem mostly useful for inflation protected income during retirement. For someone like me in his mid 30s who is still 20-30 years from retirement, is there any advantage in laddering TIPS?
I don’t expect to need steady income 1, 3, 5, etc years from now and so most of my retirement savings are in equities, with my non-retirement cash / “emergency savings” is in a variety of semi-liquid forms of HYSA, I-Bonds, and T-Bills.
I also think it’s too early for me to look at 20 or 30 year TIPS, and instead to hope my equities will continue to grow before I start transitioning to bonds, etc. (obviously who knows what will happen in the market).
Yes, I agree a ladder of TIPS would be less useful for you in your mid-30s. The idea of the TIPS ladder is to create 20 to 30 year predictable and inflation-protected cash flow, which you probably don’t need yet. In your 30s you can be more aggressive. If you can do Roth accounts, do them. I Bonds could be useful as a backup emergency fund, since you get full access after 5 years but until then the interest is tax deferred.
Thanks, I appreciate the confirmation!
I’ve gone back and forth on Roth vs Traditional over the years as our situation and my opinion changes (asset-wise we’re now split about 50/50), but I’m leaning more towards Traditional at the moment because we’re right on the 12%/22% bracket line and if nothing else paying close to double taxes on the marginal dollar to use the Roth just feels bad.
I shifted a bunch of our emergency fund into I-Bonds when I learned about them (and your blog!) a few years ago along with everyone else. Since we’d use the HYSA and T-Bills cash first, we probably (hopefully?) won’t need the backup to the backup, so the I-Bonds are also an option for the kids’ college expenses in 10+ years if we need to supplement the 529s.
Excluding our home and 529s, we’re about 77% equities and 13% cash equivalents with the rest in bonds and real estate funds, which seems high for the cash but I’m undecided what else to do with it? We started saving early so by the rules of thumbs and calculators we’re ahead of pace for retirement savings, and I was hesitant to put even more money into restricted accounts and the market before we settled into a long term home and jobs. But we ended up avoiding some big ticket items I anticipated like a new car, larger house down payment, IVF, etc so the cash reserves are still sitting there with no goal in mind.
Please clarify:
I built a hypothetical 10 year TIPS ladder at tipsladder.com, asking for $10,000 a year income starting 2025.
The system states I need a $105,275 net purchase to give me a total income $116,576.
My question: Is the total income definite or in addition to the $116,576, in any given year depending on inflation, I may make more than current listed income?
Hard for me to say. When I generate a 10-year ladder on that site, with $10,000 a year starting in 2025, I get a cost of $91,541 and total income of $100,655. The income you see would be inflation adjusted, meaning the inflation-adjusted value of $10,000 (approximately) would be generated each year.
That is interesting and concerning, we got different rung amounts, so I imagine different Cusips as well. I’ll try again. Thanks!
You left out Zweig’s statement about investing in Tips funds if you don’t need the money on a specific date. There are pluses and minuses to individual Tips, which you neglected to mention.
My point in talking with Zweig is that investors should not view a TIPS fund as a “core” holding. But these funds are fine as an open-ended investment giving some inflation protection, as long as the investor realizes there is the potential for a 12% decline, as in 2022, or a 10.8% gain, as in 2020.
For an investor seeking a certain inflation-adjusted payout in future years, individual TIPS held to maturity are the way to go.
Hello David,
Has there been any update on the I- bond gift box email? My wife and I have received the deliver as as as possible email.
Thanks – Josh
No announcement yet.
Hi David,
I’ve been building my TIPS ladder over the past year with the objective to cover about half of anticipated RMD when they come. Thanks for your knowledge and sharing.
WRT covering the gap years, I’ve read about three main strategies.
a) buy bonds or CD’s that mature in advance of the gap year, and then buy the relevant TIP (eg buy a bond maturing in 2025 then purchase the 10 year TIP for 2035, etc)
b) buy extra TIPS that mature in 2034 to cover the gap years through 2039
c) buy extra TIPS that mature in 2040 and sell early to cover each gap year
Are there any notable pros and cons? There is some element of interest rate risk to all of them. My goal is to set up an auto pilot type of ladder. I’d appreciate your and others thoughts. Many thanks
I’ve actually done all three of these things. I really like the 10-year timeframe, so I have loaded up extra on 2033 and 2034, and probably will do the same for 2035. My RMDs begin in 2026, so things will get more complicated. I keep backup accounts in the traditional IRA (Vanguard Wellington and Total Bond Fund) to help with withdrawals when my maturities fall short, which could happen in those gap years.
Thanks David. So will your 2036 be funded from the extra 2033 maturities? A three year TIP or nominal bond or MM fund?
I like the idea of hedging inflation risk until 2033, then just buy a three year bond and hold it to maturity. Compared to bulking up the 2040 rung and selling each gap year early which might be riskier. It seems there’s more certainty to ‘ladder in’ with the earlier matured TIPS.
For years 2036 to 2039, I will probably reallocate money from my backup holdings in that IRA account. For 2040 I have bulked up “a bit” but not substantially.
Why a balanced fund and a bond fund? Not that the Wellington isn’t a good fund, but wouldn’t it make more sense to do the total bond and total stock? Hold more in the bond portion since that’s essentially what you are doing now and save on fees?
Don’t worry about a default… they can and will raise taxes as needed if push comes to shove as they always did in the past.
I passed on the last 5-year TIPS that auctioned in October, but I’ve been watching it on the secondary market. At auction, $10,000 PAR would have cost $9,982.82, but every day I’ve checked, it’s gotten cheaper. Today, I went ahead and bought it at $9,920.55 on Fidelity, but part of me is thinking it will be even cheaper tomorrow. It seems like a bargain, and I am expected inflation to return, but minnesotaswede makes excellent points about Schedule F.
Yes, the 5-year real yield has popped from 1.67% at the auction to a current trade of 1.88% today. As the Fed lowers interest rates, the 5-year will tend to follow along, at least somewhat. So I guess that 1.88% is a buying opportunity.
Minnesotaswede has expressed my concerns quite well.
I’m sincerely befuddled by people who just assume USG continuity in these times.
The future promises / “obligations” of the Treasury seem to me to as questionable as they have ever been in history.
The risk premium is radically different than before, and thus my calculations have changed dramatically.
Safest investment? Ha ha, lol!
This is something that has concerned me for years: the issuer of all these “safe” Treasury securities has–what? $33 trillion? $35 trillion? whatever, it’s still constantly growing–in accumulated obligations. This is a figure so mind-boggling that it’s almost impossible to conceive of its existence, let alone its being repaid if too many obligations came due simultaneously.
At the same time, I appreciate economists’ observation that government debt is not just quantitatively but also qualitatively different from household debt/budgeting, and that no country whose debt is denominated in its own printable currency need ever default unless its government actually chooses to do so.
Since David’s rules for this website tell us to avoid political discussions, I’ll say nothing about how the national debt got this way, or what I think might be done about it.
Suffice to express my general view that if the United States Treasury ever defaults on its obligations, we’ll all have more pressing economic worries, and, in strictly personal terms, the possibility that the government won’t “make good” on my I Bonds and TIPS still falls in the area I call “Things That are Just Beyond My Current Ability to Get Really Strung Out About.”
Technically though the US doesn’t print up its monetary needs, it borrows it, which I think is the reason that these perennial deficits haven’t resulted in hyperinflation. Reason though would suggest that the party can’t last forever.
When the US just outright printed greenbacks in the Civil War it resulted in the highest inflation rates in US history in 1863-64.
If you are an American and concerned about late payment or default then FDIC insured bank accounts would be just as safe, especially since it’s possible they might be a few days late on paying a T-Bill due to a government shutdown or delay paying interest on a Treasury Note or Bond – even though such an event would be akin to the groom walking in on the bride cheating with the best man – an irrevocable breach of trust, even though they may go ahead with the wedding regardless to make the families happy.
If it gets worse than that, like an actual haircut on principal or actual default, then you end up hunkering down with your food or ammo, or work together with your neighbors in mutual aid outside of organized government – depending on your point of view. Nothing, neither gold, bitcoin, etc. would matter at that point. Using the analogy above, that would be the bride taking the best man and running away with him immediately after vows are exchanged. All hell can and would break loose then.
If you are not an American then other country’s debt may be just as viable. Europe and Japan have just as much a debt crisis as we do. Globally the exceptional nature of US debt is coming to an end as we move into a multi-polar world.
MSL — the word “befuddled” is my new favorite adjective.
TipswatchChat and Henry — your sentiments reflect my Dad’s who said if the stock market ever goes truly kaput (or near kaput), we’ll have bigger problems on our hands.
Ever since the Great Financial Crisis of 2008, I have resented even having to think about things like depression, zero-interest rates (or even negative rates), financial hijinks and the like. The general economic principles that have been in place for many years seem to be tossed on their heads and no longer valid. Or maybe they are valid and just being suppressed. Or maybe we are just regressing back to some historical mean. Or maybe on the cusp of something new and different.
It’s the realization that our historic assumptions may no longer be valid; that past performance does not guarantee future results, and all things are subject to change. That we can’t see far enough ahead to know if we are headed forward or back.
When one works hard to achieve some level of financial security, it’s hard (and disappointing) to see growing threats (albeit, perhaps, with a very low overall probability) that could turn the tides very quickly.
Thank you, good article. But I am not getting something – how does $13,435 bond purchase that matures in 2025 result in “inflation adjusted base income of 20,000”?
tipsladder.com shows 5K interest for bonds maturing in 2025, 2026 – more than 30% return in 1 year?
I am going to guess this comes from applying a 2% coupon rate to nearly $500,000 in total TIPS assets. You have to look at the entire portfolio.
Seems like something along those lines. Not sure why it is set up like this though. Portfolio becomes 480,000 in year 2, 460,000 in year 3 and so on – if people actually use it for “base income” every year. Adding the entire 30-year interest into the first-year calculation does not make sense.
This is the way this type of TIPS ladder is designed, to throw off an inflation-adjusted $20,000 every year (approximately) in maturing TIPS and interest. The ladder will deplete itself after 30 years of reliable returns. The investor doesn’t have to spend the money. It could be reinvested.
As an alternative, an investor could buy $1 million of a 30-year TIPS and hold to maturity. That would generate about $20,000 a year in coupon payments, rising with inflation, and the full inflation-adjusted $1 million would be there 30 years later.
I read your “TIPS on the Secondary Market” a few days ago. I had only owned two TIPS of twelve bonds each.
At this moment, I am selling equities after the great equity gains. I decided to fill out a ladder of TIPS with the proceeds of the sales. The Secondary Market article advises how to compare purchases, but I got lost in it. I decided to buy twelve bonds for the missing rungs in my ladder. When presented with the choices at Fidelity, I decided to pick the lowest coupons, because I don’t need income.
In “Bonds”, the authors Stan and Hildy Richelson say that “TIPS are a good choice for diversification”. Now I have some!
An I Bond ladder is much better than a TIPs ladder because TIPs go down in value if interest rates increase and I Bonds do not.
This could be true for long-term TIPS you are purchasing on the secondary market, because they might have high inflation accruals that won’t be protected against deflation. However, deflation has rarely been even a one-year problem: https://tipswatch.com/2024/06/23/dont-over-think-the-potential-threat-of-deflation/ … So the 80-basis-point advantage of a TIPS makes a purchase justified, especially given the purchase limit for I Bonds.
However, I am a big fan of I Bonds and continue to invest in them.
Yes, but I am not talking about inflation or deflation. I am talking about interest rate increases For example, at 11/30/2021, the YTM of the 30 Year Treasury was 1.79% and now it is 4.471%. At 11/30/2021, the bid on the 30 Year TIP (2/15/51) was 118.18 and now it is 59.12 – down 50%. TIPs go down in value if interest rates increase and I Bonds do not.
Jon, there is no market risk if you hold a TIPS to maturity. It will return to par value + inflation accruals at maturity. But for people who can’t commit to holding to maturity, a 20- to 30-year Treasury of any kind will be volatile and could lose money with an early sale, or gain money if yields decline.
So a TIPS ladder is “riskless” only for people confident of holding to maturity. I have been investing in TIPS for 25 years and I have never sold one early.
On the other hand, I Bonds are great for someone unsure about when then will be redeemed because you can redeem after 1 year with a 3-month interest penalty, or after 5 years with no penalty. I don’t plan to hold I Bonds for 30 years; that’s a cash account I will use in the future.
If inflation is negative, TIPs go down in total value even if held to maturity (because the income accrual is less) but I Bonds do not go down in value if inflation is negative.
Now we are back to my original statement, that there is some deflation risk for TIPS, especially if you buy a TIPS with a large inflation accrual. But if you buy at auction, let’s say, at a price slightly below par value, you are guaranteed to get back your original principal at maturity. Plus you are earning a 1.8% annual coupon. I contend that deflation isn’t a long-term risk. (The U.S. hasn’t had a single Dec-to-Dec deflationary year in at least 52 years. The closest was 2008 at 0.1%.) If you have 1.0% deflation in a year, that 1.8% TIPS will return 0.8% nominal and the 1.2% I Bond return will drop to about 0.2% for at least six months.
I Bonds do have better deflation protection, can never go down in value, and the interest keeps compounding. Those are the advantages. The TIPS have a higher real yield. The biggest danger with TIPS is trying to swing a purchase that will mature in 5 or 6 months. You can lose money doing that.
Isn’t the TIPs inflation adjustment based on monthly, not annual, CPIU inflation? Is it true that a TIPs accrued income goes down any time there is a decline in monthly CPIU? I agree that an annual decline in CPIU is unlikely, but monthly declines are fairly frequent.
Yes, the TIPS accruals are based on non-seasonally adjusted inflation from two months before. And almost every year will have a month of minor deflation because of the way non-seasonally inflation works, and that gets balanced off in upcoming months. The I Bond’s six-month variable rate will also end up lower because of the months of deflation. I Bonds do a bit better because the principal balance never declines. TIPS get the advantage of a higher coupon rate. Both are quality investments.
I could not believe it when you said you have 98% of all your assets in I-bonds!!! You assets are languishing in a weak performing asset. I like I-bonds and have over 60,000 of them, plus more than that in TIPS, but you could be doing so much better with taking on some risk with a decent allocation to other assets that provide some growth.
Everyone’s circumstances are different. So there could be reasons for this allocation, which is very safe but also low-growth.
If had a measly $1 billion I would be so, so happy to get even a 1% return! An easy $10 million a year. I’d never have to work again!!!.
“An easy $10 million a year. I’d never have to work again!!!.” Wow! I never made close to $10 million a year. How do you manage to spend all that money?
I should have said that 98% of my financial assets outside my retirement plans (pension, IRA, rollover IRA, and Keogh) are in I Bonds. At this stage of my life, asset protection means more to me than asset growth. I lived through the dot.com bubble (the S&P 500 did nothing for the first 13 years of this century) and now there is the AI bubble. And a $35 trillion National Debt growing every day.
My question would be how much fixed income one should keep in bond funds (not inflation protected)?
In my FI: 19% in iBonds (mature in 2031), 48% in TIPS, 21% in bond funds (VCIT), and 12% in short term or money market. Perhaps I have enough inflation adjusted bonds at 67% ?
If I buy more TIPS then I could run into issues should stocks sell off and I want to rebalance back into them. Another possible problem would be if I have to cash some TIPS prematurely because of some emergency issue and they are at unfavorable low points.
My household’s asset allocation is approximately 35% stocks, 62% bonds (including total bond funds, I Bonds, CDs, individual nominal Treasurys and TIPS) and 3% cash. Inflation protection is about 15% overall, but my wife’s accounts include no TIPS or TIPS funds. My long-time goal for inflation protection has been 15%, and none of that is in funds.
My household allocation is about 98% I Bonds.
“I began converting all my VTIP and part of my Total Bond Fund (BND) investments into a ladder of individual TIPS, all in a traditional retirement account.”
David does your above statement still make sense to do today and use the money to build a TIPS ladder in a IRA? Thanks
This partly depends on your investment purpose. If you want TIPS as a stable percentage of your portfolio with no end date, VTIP is a good choice, understanding the potential volatility, which is limited but still there. If you want defined amounts to mature each year out for a set number of years, providing a certain inflation-protected dollar amount, the TIPS ladder is the best choice, in my opinion.
Thanks again. Only concerns is selling my BND fund which is down since it high of Aug 2020.
I am trying to build out a 10 year ladder (2029 to 2039) over the next 4-5 years by purchasing at the 5 and 10 year auctions. I just bought my first TIPS for 2029 and 2034 at the most recent auction.
I don’t have enough cash now to build the full ladder, but I could buy some 2030 to 2033.
I see from your ladder you have both the Jan and Jul CUSIPs. Is that by design or just how it ended up? I was wondering if it is worth it to have both CUSIPS or just have the CUSIP per year? Since I am kinda “dollar cost averaging” I can see buying at both auctions, but then I’d have 20 CUSIPs to manage instead of 10.
Good question. If I owned only one it would be the January issue so I can withdraw a potential RMD as cash or figure out a reinvestment. In this case I liked having a mid-year maturity to give me flexibility. You are right though, the best ladder would have one a year, or two at most. Mine is a mess in the early years.
I have a question for the group… is this a case where I should cash in my I-Bonds with low or 0% fixed interest rate component and put the proceeds into a TIPS ladder? I retire late 2025 / early 2026.
This could make sense. Would you be doing it in a taxable account? I have cashed out almost all my 0.0% to 0.2% I Bonds, but I reinvested in the 1.3% I Bonds this year.
Yes, taxable account.
Given the great no-decline-in-value-if-interest rates-increase protection that you get from I Bonds (but not from TIPs), and given the $10,000 per TIN (I have 8 TINs) I Bond annual purchase limitation, I have not redeemed any of my I Bonds. About 98% of my money is in I Bonds. Jon Gutek, JD/CPA
Great article.
What about using iSHARES iBONDS ETF TIPS to build a 10 year TIPS ladder? Any pro and cons as compared to buying real TIPS on secondary market? Thanks
These are good products, with a very low expense ratio, and might be good for a taxable account. My one nitpick is that all TIPS ETFs, including these, pay out the inflation adjustments as current income. So at maturity, you get back par value + a final coupon payment. As long as you can reinvest that income back into the ETF, it will probably work out fine. See: https://tipswatch.com/2023/12/03/lets-look-at-the-new-ishares-defined-maturity-tips-etfs/
Thanks for the article. Always good to remind us/me of the difference between buying individual TIPS (and iShares ETFs) verses broad-based TIPS funds. Thanks again.
That ladder tool is really nice, thank you.
I agree. It solves calculations that I could never do, in just a few clicks.
I can’t tell you how appreciative I am of your TipsWatch blog – it has helped me immensely in understanding TIPS and building a portfolio.
However, I am getting skittish about the safety of Treasury securities. While they are secured by the full faith and credit of the United States (and have been since our founding) who’s to say that will always be the case? With the world changing so quickly it seems you can’t assume anything – natural disasters, pandemics, bank bailouts. Additionally, talk of federal default and fiscal cliffs does not engender trust and full faith.
So, I am trying to look ahead given a revised trajectory that is quite different than where we have been before. How might that affect the safety of TIPS that can be 10 to 30 years in the future, a future that will likely be very different than today.
Besides the growing debt, there are a lot interest rates pressures, some internal and others external. The Feds don’t want to pay more in financing costs and they will be motivated to keep their borrowing costs down.
While they don’t dictate the long end of interest rates, they can influence a lot of things. Should Schedule F be implemented, the integrity of the federal statistical system could be compromised by replacing career experts with political appointees, resulting in previously independent statistics becoming subject to political influence.
For example, they could change the measure for inflation to lower it (thus reducing how much gets paid out to all the smart folks who followed David’s advice). They could also dictate that interest rates on outstanding Treasury bonds will now be a fraction of the full amount (take it or leave it).
It just seems there is more opportunity for fiscal and monetary hanky-panky that can have substantive collateral damage and that makes me nervous.
Very well said. I have these exact same concerns.
There definitely is a greater degree of risk of default on Treasuries, probably an order of magnitude. Still going to be pretty rare and much less likely than the other G7 nations, but it is going to be there. The funny business with inflation, you could mitigate by purchasing other countries’ inflation adjusted bonds (although then you’re dealing with their inflation numbers). The UK offers gilts, there are French OATIs, and others here: https://en.wikipedia.org/wiki/Inflation-indexed_bond although this is unlikely to be viable for most investors, unless you have substantial capital.
I would be absolutely looking at foreign developed market government ETFs, though. Here are a few options: for dollar denominated/hedged sovereigns (government issued), IAGG or BNDX in lieu of AGG or BNDX – IAGG is 80/20 government to corporate whereas US AGG is 45 Treasury, 25 mortgage backed, and 30 corporate. For local currency denominated sovereigns, BWX and IGOV in lieu of GOVT, for short term foreign debt ISHG and BWZ instead of SHY or VGSH. The dollar is strengthening now due to an anticipated more robust economy and more tax cuts, but if the promised tariffs are imposed, the dollar will weaken.
If you were looking at holding the global share of tradable bonds, BNDW, the Vanguard global bond ETF, is roughly 50/50 BND/BNDX (US/international), and BND is 2/3 US and agency debt, while BNX is closer to 75% non-US government debt. I already substantially diversify in my equities to international, VT is a core holding in my Roth IRA and my investments overall are roughly 2:1 US to international. The counterpoint to that would be what Jack Bogle said regarding international diversification, in that presumably most of the readers here live in the US and are planning to continue to live there until they die; and that US companies are tied to the world anyway. The same would go with the US government, and I highly doubt other debt holders would let them get away with bluster for more than the day or two it would take to spook the markets.
I don’t think the U.S. will default on its Treasury debt, and if it did, the U.S. stock market would also get crushed, and the U.S. dollar would lose its reserve status. And I don’t think, up to this point in my lifetime, that the government has made major efforts to “lie” in its statistical reporting. But your Schedule F point is valid, and worth fearing. What investments are the alternative? China? Bitcoin? Gold? — These are completely outside my area of expertise.
Your well-articulated concerns resonate with me. I had assumed that Schedule F would apply primarily to agencies like DOJ and EPA. Thanks to your comment, I am now newly concerned about the potential politicization of the federal statistical system and the consequences for TIPS and many programs with COLAs like Social Security.
I think I’m going to slow-walk my TIPS ladder creation decision… I think my entire retirement decision is being delayed because of policy uncertainties. If you have no visibility, you can’t plan.
Schedule F also means a lot of collective and historical knowledge and skills would be gone. And it would take a lot of work (and time) to get back up to speed.
A relative worked at the Congressional Research Service — they do research on policy related subjects to guide Congress in crafting/modifying laws or regulations.
When a new crop of representatives would come on board CRS was there to direct them to already-done research and eventually perhaps the need for updating or instituting new research. No sense in trying to recreate the wheel.
If you want to know more, search on “Schedule F repercussions”.
What is Schedule F?
Dennis, I assume you’re familiar with Google?
It would, among other things, lead you to these:
https://en.wikipedia.org/wiki/Schedule_F_appointment
https://en.wikipedia.org/wiki/Project_2025
In terms of inflation-indexed securities, and the fears expressed by commenters minnesotaswede and justin above, it’s a concern that the bureaucracy of career public servants will be stacked with political loyalists who will decide on policy outcomes in advance (e.g., a particular rate of inflation) and then massage the “facts” to produce the desired outcome. Evidence to follow conclusions, instead of the opposite, so that if the measure of “inflation” was dumbed down to depart from reality, the presumed protective characteristics of TIPS and I Bonds, compared to real-life experienced inflation, would be dramatically lessened.
Your site enlightened and educated me on TIPS. In 2023, I got 6,000 par 5 year TIPS in Treasury Direct at the auctions to replace some of the 0% I-Bonds that were redeemed. Also participated in 5 year auctions through Oct 2024 and got a lot more in retirement accounts. Next, will have to look into more of a ladder. All I got are 5 year TIPS.
I read Now is a great time to build (or improve) a long-term TIPS ladder with great interest. One question that arose: let’s say I build a 30-year ladder in a standard IRA, only live for 10 more years and the beneficiary has to liquidate the inheritance within 10 years, they can transfer in kind to a taxable account, but how will they pay the taxes due without selling? This assumes they do not have extra money to make the tax payments.
I am not a tax expert. If the beneficiary is a spouse, that person can take over the account as their own, with standard RMDs kicking in at age 73. If not a spouse, then there will be the 10-year withdrawal path and taxes will need to be paid.
Thanks for your quick response
David, indeed this can be an issue and the non-spouse beneficiary would have to sell/cash out at least a portion of the TIP to pay the taxes.
I too have had these concerns and am limiting myself to a maximum term of 10-year TIPS. They can then take the proceeds and use them however they want.
While it can short-change me, it can simplify things for them. There is always a tradeoff.
The other way to look at it, is that this is bonus money for them, and they will have to deal with the consequences.
Good point. Cashing out of the ladder early at the rate of 10% a year would disrupt the ladder. The beneficiary might end up trading out the TIPS and getting into a simpler investment in the inherited account. My traditional IRA is going to charity, so not a concern for me.
Thanks, David. I’m curious what percentage of annual spending is your inflation-protected TIPS floor?
A spending floor wasn’t my main concern. I set the TIPS ladder in my traditional IRA to cover (approximately) my RMDs for each year. I have backup investments in Vanguard Wellington and Total Bond Fund in that account to make up the difference. So those RMDs will be part of my income plan for each year — I just set an AGI limit and try to hit it, often with Roth conversions at this point.