By David Enna, Tipswatch.com
At this moment, I am on a Viking cruise ship sailing out of Gdansk, Poland, and could lose internet access at any moment. So this is going to be quick.
The U.S. Treasury’s $18 billion reopening auction of a 10-year Treasury Inflation-Protected Security — CUSIP 91282CML2 — generated a real yield to maturity of 2.220%, the second highest result at auction for this term in 16 years. This result exactly matched the “when issued” prediction, released just before the auction’s close. The bid-to-cover ratio was 2.36, a decent level. In other words, demand was acceptable.
Definition: The “real yield to maturity” of a TIPS is its yield above official future U.S. inflation, over the term of the TIPS. So a real yield of 2.20% means an investment in this TIPS would provide a return that exceeds U.S. inflation by 2.20% for 9 years, 8 months.
CUSIP 91282CML2 had its originating auction on January 23, when it generated a real yield to maturity of 2.243%, just slightly higher. That set its coupon rate at 2.125%.
I have been in Scandanavia for 10 days now, and from what I can see the U.S. bond market has been a bit volatile, due primarily to congressional action on future tax cuts. The end result (as always) is that federal deficits are likely to rise fairly dramatically over the next 10 years. The bond market is not happy, but so far it isn’t throwing a fit.
So we have real yields bumping on 16-year highs. This is a trend that could continue throughout 2025, unless the Federal Reserve decides to take extreme action, which seems unlikely. Here is the trend in the 10-year real yield over the last two years:
Opinion: A real yield of 2.220% offers an attractive above-inflation return for an investor willing to hold to maturity. And it’s very possible that real yields will continue rising. We are in an “era of uncertainty.” But getting 2.220% above inflation, guaranteed, is attractive.
Pricing
This auction’s real yield of 2.220% was slightly above the coupon rate of 2.125%, so investors got CUSIP 91282CML2 at a discount, with an unadjusted price of 99.178357. In addition, this TIPS will have an inflation index of 1.01320 on the settlement date of May 30. With that information, we can calculate the cost of $10,000 par value of this TIPS:
- Par value: $10,000.
- Principal purchased as of May 30: $10,000 x 1.01320 =$10,132.00.
- Cost of investment: $10,132.00 x 0.99178357=$10,048.75.
- + accrued interest of $80.29.
To summarize, an investor buying $10,000 par value at today’s auction paid $10,048.75 for $10,132.00 of principal as of May 30. From then on, the investor will earn adjustments to principal equaling U.S. inflation over the next 9 years, 8 months, plus collect a coupon rate of 2.125% annually on adjusted principal. The accrued interest will be returned at the first coupon payment in July.
Inflation breakeven rate
The 10-year Treasury note was yielding 4.56% at the auction’s close, meaning this TIPS has an inflation breakeven rate of 2.34%. The TIPS will outperform the nominal Treasury if inflation averages more than 2.34% over the next 9 years, 8 months.
I’ve seen speculation recently that the 10-year note’s yield could exceed 5% in the near future because of bond-market unease. That would probably drag the 10-year TIPS yield up to at least 2.6%, possibly higher. I’d consider a 5% 10-year Treasury note an attractive nominal investment. Same for the 20-year TIPS with a real yield of 2.68%, the current rate.
Here is the trend in the 10-year inflation breakeven rate over the last two years, showing a fairly wild ride in inflation expectations:
Thoughts
My internet held out, so now I can add a brief rant.
I admit to being out of touch. It seems like a lot of craziness has been happening in the last 10 days (or six months, honestly). I don’t have a grasp on where we are heading. Inflation “appears” to be moderating, but tariffs could cause extreme disruptions. For example, should Walmart raise prices to match its tariff costs? The answer seems obvious: Of course it should. (I am a Walmart shareholder; maybe I am biased.) Walmart could “eat” some of the costs, but their competitors face the same disruptions. So everyone will be raising prices.
The bigger issue right now is the path of future U.S. deficits. I agree we face a “spending problem,” but adding in huge new tax cuts is only going to make the problem worse. I just want a responsible federal government, making sure tax revenues and spending are coming more into line.
Tipswatch is not about politics, though. I congratulate investors at today’s auction for getting an attractive result. Here is a look at auctions of this term over the last 5 years:
• 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 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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Hi David
Hope that the cruise is going well. Have you met any European travelers and chatted about US treasuries? I had a Dutch colleague who only bought US bonds for his retirement account. With the continued decline in US currency this seems to be a good time for Europeans to buy US ten year nominal bonds. If the dollar drops by another 5%, it’s sort of a hedge against inflation. As Americans, it seems we’re “stuck” only buying TIPS to hedge inflation.
Thanks for keeping us informed while you travel! I bought on the secondary market, just before the auction, got a 2.23% yield, with settlement today.
Thanks for your post! How does this compare as an investment to the most recent I Bond rates, in your opinion?
For pure above-inflation yield, the TIPS wins, especially if held to maturity. The I Bond wins for ease of ownership, tax deferral and flexible maturity.
Best concise description I’ve seen of the comparative pros-and-cons of these two types of securities.
Best concise description when real rates are positive. When real rates are zero or negative, it’s I Bonds all the way. This was the case not too long ago and extensively discussed here, I believe.
P.S. “Make everything as simple as possible, but not simpler.” — Albert Einstein
I found this article to be alarming:
https://finance.yahoo.com/news/citi-ceo-something-deeper-is-going-on-in-financial-markets-right-now-164730586.html
During Trump 1, the Tax Cut and Jobs Act powered economic growth to… the same economic growth rate as during the Obama Administration with the added benefit of growing the debt. So much winning. The corporate tax cuts seemed to be recycled into buybacks, not additional R&D.
One can not say, with dead certainty, that the TCJA had no positive effect on growth, perhaps we would have done poorly without it, but there’s no evidence that it had any positive effect.
So, naturally, Trump 2 is going to repeat the experiment.
The markets are signaling, as Ms. Fraser says. Something I hadn’t taken notice of until recently, is interest charged on other countries’ debt. Japan is paying 3.5% for very long term bonds. We were paying 4.5% and not it’s jacked up to 5%.
What’s an individual investor to do? I have no better ideas than very short term T-BIlls plus TIPS and, perhaps, some non US debt. Any other suggestions would be welcome.
Another commenter mentioned WIP recently, and I like the idea but the 0.5% expense ratio is discouraging.
Up to this point, I have only bought 5 year TIPS, but the attractive real yield of 2.22 got me to get 5K at this reopening. I am sure I will hold all of the 5 year TIPS to maturity, but not sure about this 9 year 8 month one. May have to if real rates keep going up because then I would sell at a loss.
I’ve also only purchased 5y TIPS. Was considering a 5k investment at yesterday’s auction but didn’t take the leap. I see greater upside potential in real yields, but who knows what will happen. 2.22 is a cool number though 🙂
I bought this via Fidelity in a tax-advantaged account. The sale went through today. I don’t know if it was through the auction or the secondary market. I wanted to buy $5k worth. These were the stats:
Shares: +5,000.000
Price: $99.18
Amount: -$5,064.53
Interest: $40.15
There seems to be a delta between $5024.38 and 99.18*50 = $4959. $40.15 in accrued interest is only part of it. Is Fidelity charging me a bump?
That pricing looks correct, based on a quick look. Remember that you are buying additional principal, which adds to the base cost.
To expand on David’s correct answer. When your purchase $5000 face, you also have to purchase any increase to the principal from inflation which has already accrued before you purchased.
The Index ratio for this issue on the settlement date will be 1.0132. Thus you actually purchased $5000×1.0132 = $5066 of TIPS. x 0.99178 (price) = $5024.38 plus $40.15 interest = $5064.53
Wow, thanks very much, both of you.
The big picture is that I’m in late middle age and realized that I should start a bond ladder to (partly) fund RMDs. This impulse purchase was a first toe in the water.
Cheers!
Thanks for your work, David.
I purchased this TIPS re-issue at today’s auction for our accounts.
It appears to me to be a very good yield above inflation… I didn’t buy more because I loaded up at the original auction.
I’m looking for those 4% yields above inflation like 25-years ago.
Miniscule point, I think breakeven according to your numbers is 2.34%
Thank you. This is fixed.