For some reason, the $110 net asset value is a marker for me.
By David Enna, Tipswatch.com
I have been writing about Treasury Inflation-Protected Securities for more than 14 years, and that is plenty of time to dream up “significant patterns” in my mind. One of those was a $110 asset value for the iShares TIPS Bond ETF.
One thing to note, right away, is that the net asset value of the TIP ETF is pretty much unchanged all the way back to 2010 — 15 years with no gain. However, net asset value excludes dividends, which include inflation accruals. So in theory, the TIP ETF’s performance should closely match inflation over those years. TIP had a total annualized return of 2.71% over the last 15 years, according to Morningstar. U.S. inflation has averaged about 2.6% over that time.
I generally don’t invest in TIPS funds or ETFs, and if I did I would use VTIP, Vanguard’s short-term TIPS ETF, which has less volatility. But TIP is the largest TIPS fund and a good indicator of the overall market, since it hold TIPS of all maturities.
For many years, I used the $110 price as a “buy” signal for TIPS in general, indicating favorable market conditions for an investment. And that worked often, as shown in the chart, with TIP bouncing higher repeatedly once it hit $110. Here is an example of my writing from November 2015:
I do follow the TIP ETF to check on the overall trend in TIPS, and I have said for a long time that TIPS values would be returning to a more ‘normal’ level when the TIP ETF dropped below $110.
This was never an “investment strategy,” but an attempt to get an idea of the relative “safety” of an investment in TIPS. In September 2022, the ETF again dipped to $110 as the Fed was intensifying its battle against inflation by raising short-term interest rates and slashing its balance sheet of Treasurys. I wrote then:
The bond market is a very scary thing in September 2022 and I’m not going to argue that anyone should be pouring money into TIPS mutual funds or ETFs. But I will argue that TIPS in general — along with these funds — are much more attractive today than they were six months ago, when the 10-year TIPS was yielding -1.04% and the TIP ETF was trading at $122.46.
The background
You need to understand that I started Tipswatch.com in April 2011, at a time when the Federal Reserve was beginning a decade of significant manipulation of the Treasury market, through a bond-buying process known as “quantitative easing.” In simple terms, the Fed began buying (and holding) medium- to longer-term Treasurys, including TIPS, to force down yields.
The first phase of QE began (mildly) in November 2008 and the second phase (also mild) started in November 2010. Things stepped up dramatically in late 2012. In this process, the Fed was “printing money” by buying up and holding Treasurys in competition with bond investors.
This continued — off and on — through March 2018, when the Fed began a brief program of “quantitative tightening,” allowing Treasurys to roll off its balance sheet. But then came the COVID crisis in March 2020. At that point, the Fed’s relaunched QE in a ballistic form, as reflected in this chart:
This chart and the next one are important in explaining the massive surge in inflation we saw in mid 2022, when the U.S. inflation rate hit a 40-year high of 9.1%. This was combined with congressional actions to push out stimulus checks to nearly all Americans. This next chart shows the incredible growth in M2, defined roughly as the U.S. supply of spendable cash:
You can blame the Federal Reserve, President Trump, President Biden, the COVID crisis, Vladimir Putin, etc., but the result after March 2020 was very high inflation. That problem is lessening today — thanks to aggressive braking action by the Federal Reserve — but inflation remains a bit high today at an annual rate of 2.4%.
What does it all mean?
Pretty much nothing. The $110 milestone was a creation of my imagination, but I do think it is a decent marker of equal levels of risk / potential gain in the TIPS market. The difference today is that the net asset value is rising to $110 instead of falling there. So is that a “sell” signal instead of a buy? I don’t think so, but there is no certainty today in the U.S. Treasury market, which will be strained by years of increasing U.S. budget deficits.
As I have noted, I don’t invest in these funds or ETFs and I don’t purchase individual TIPS for potential trading gains. Buying individual TIPS to hold to maturity is close to a “risk free” strategy, especially when real yields are at historically attractive levels.
• 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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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 
David – I just had this really interesting and informative ( if true) chat with ChatGPT. I’ll start with the question I posed:
In 2024, VTAPX only paid out 2.7% dividends even though the two components of the interest – coupon plus inflation adjustment – were closer to 4%. Why wasn’t I taxed on that 4% as I would with an individual TIPS bond?
ChatGPT answered:
Great question — and you’re exactly right to notice the discrepancy between the total return of TIPS and the taxable income from a TIPS fund like Vanguard’s VTAPX (Vanguard Short-Term Inflation-Protected Securities Index Fund).
✅ Here’s why you weren’t taxed on the full 4% in VTAPX:
1. Only Distributed Income Is Taxable in Funds
VTAPX only paid out about 2.7% in dividends in 2024.
You’re only taxed on what the fund actually distributes to you (as dividends).
The remaining ~1.3% of the return (coupon + inflation adjustment) likely remained unrealized inside the fund — reflected in the fund’s NAV increase, not distributed as cash.
So, no distribution = no taxable event in a mutual fund.
When you hold individual TIPS, the inflation adjustment (OID) is reported as taxable income every year, even if you never see that money until maturity. That’s phantom income.
But VTAPX:
* Doesn’t pass through OID
* Instead, realizes the inflation gain only when TIPS mature or are sold
* Pays that out if the fund chooses to distribute it — otherwise, it stays in NAV.
📌 What happened in 2024:
The fund earned more than it distributed.
Likely reasons for lower distributions:
Some TIPS hadn’t matured or been sold, so inflation gains remained unrealized.
Fund managers may have chosen to retain some gains in NAV to smooth future payouts.
ETFs and index funds like VTAPX often try to minimize taxable distributions.
David – Does this sound right to you? And if so, doesn’t;t this favor holding in a taxable account VTAPX rather than individual bonds?
I asked ChatGPT, which can be inaccurate on esoteric subjects: “Does VTAPX pay out inflation accruals as dividends?”
The answer: “Yes, VTAPX (Vanguard Short-Term Inflation-Protected Securities Index Fund) does pay out inflation accruals as part of its dividends. The inflation adjustments to the principal generate additional interest income, which is then distributed to shareholders as part of the fund’s quarterly dividends.”
From the Vanguard prospectus: “a mutual fund holding inflation-indexed securities pays out (to shareholders) both interest income and the income attributable to principal adjustments each quarter in the form of cash or reinvested shares, and the shareholders must pay taxes on the distributions.”
What you write is also my understanding of how TIPS funds work, but the still unexplained fact for me is why I received and paid tax on only 2.7% worth of dividends on my VTAPX holdings. (Just to clarify my math, this was easy to calculate because I neither bought nor sold shares that calendar year, and I don’t reinvest dividends in this taxable account. So I divided the $1935 of total reported dividends by the start of year value of $70,775.)
I read that the CPI-U for 2024 was 2.9%, and my understanding is that is equal to the inflation adjustment piece of my interest. I don’t know what the average real yield was for VTAPX in 2024, but I believe it had to be 1.1% or more based on its 2-3 yr average maturity. So I’m thinking I should have received and been taxed on a combined interest of 2.9% + about 1.1% = about 4.0%.
The total return for VTAPX in 2024 was 4.73%, so I’m guessing/hoping that I wasn’t shorted income, but if not, I’m still left wondering why I only had 2.7% reported and taxable interest? I’m asking you because I know I’ll get nowhere asking an employee at Vanguard.
One small thing to use in your calculations: The December final inflation numbers for a TIPS would be one-year inflation as of October 2024, which was 2.6%, less than you were figuring. So the question is how Vanguard determines its quarterly pay-outs, since annual inflation was 2.4% as of September. It could be a factor. And also realize that the TIPS these funds hold only pay interest twice a year. It could be January – July, April – October or July – January. That could alter the interest payout in 2024 depending on when Vanguard compiles the payment. But none of this really answers your question.
Thank you, David, for your astute and informative blog, and specifically for highlighting “quantitative easing” in this post. Back in the day it had the more descriptive label of “monetizing the debt.”
Clearly, increasing deficits and an accommodating Fed point toward higher inflation and higher nominal interest rates. But what will be the effect on TIPS’s real interest rates? Simplistically, they might hold steady if anticipated inflation equals actual inflation, but decreasing confidence in U.S. economic policy would raise them, and the Fed’s future actions add a wild card.
The question is not academic. Expecting rising real interest rates might lead a TIPS investor to hold a rolling portfolio of short TIPS rather than long ones, unless the higher rates further out on the yield curve fully offset the expected rise.
Are there any articles on this issue?
FEF
Real yields tend to track along with nominal yields, so if U.S. debt gets shunned worldwide, both real and nominal rates would be rising. Higher inflation breakeven rates generally make TIPS less attractive versus a nominal alternative. We are already seeing a gap forming between short-term real yields (1.48% on the 5-year versus 2.51% on the 30-year). For quite awhile in recent years the yield curve was flat. I can understand people preferring the shorter-term TIPS, but the investor gives up quite a bit of yield. Right now the 5-year TIPS isn’t much more attractive, yield-wise, that the zero-risk I Bond at 1.1%.
I’m 70, retired, and will have 90k in treasuries maturing in October. I am 100% fixed income, no stocks. Some people have recommended that I start a TIPS ladder. Others, including my financial advisor (and also ChatGPT!) have said that since my (small) portfolio absolutely requires that I have a 4% interest rate in order to last 20 years, that I should build a solid treasury ladder with 4% interest rates. I don’t know which way to turn, which is why I’m turning to you, the TIPS guru. Is it correct that if one absolutely needs a 4% interest rate return, that one should stick with 4% treasuries and avoid TIPS? Thank you!
I am not a financial adviser. My opinion is to go with the path that gives you the most comfort. No one can know the right answer. If inflation remains relatively tame, the nominal Treasurys will do well. If inflation surges much higher, the TIPS will do well if held to maturity.
Thank you. I believe the lack of certainty that I would definitely receive 4% each year is why I need to stick with treasuries. If that’s not a correct assumption, please share your thoughts.
It’s okay to hold a mix of inflation-linked and nominal bonds. It’s a risk management technique to avoid making the “worst” decision.
I appreciate your feedback! Thank you.
Thanks for your commentary. Could you explain this further:
One thing to note, right away, is that the net asset value of the TIP ETF is pretty much unchanged all the way back to 2010 — 15 years with no gain. However, net asset value excludes dividends, which include inflation accruals. So in theory, the TIP ETF’s performance should closely match inflation over those years. TIP had a total annualized return of 2.71% over the last 15 years, according to Morningstar. U.S. inflation has averaged about 2.6% over that time.
Shouldn’t we be comparing 2.71% to 2.6% PLUS the real yield? I’ve looked at TIPS ETFs in the past and concluded that they are inferior to a buy-and-hold-to-maturity strategy because they underperform.
No. The 2.71% figure is the nominal annualized return of the ETF, after inflation was included. Without inflation, the annualized return would have been zero. You have to realize that for many years across those 15 years, TIPS had negative real yields and were therefore those TIPS were guaranteed to underperform official inflation. Back at the beginning of 2013, for example, the 5-year TIPS had a real yield of -1.36 and the 10-year, -0.62%. At the beginning of 2022, the entire yield spectrum was negative to inflation, including the 30-year at -0.36%.
Thanks for the explanation. I’m new to TIPS (and iBonds) in the last couple of years. The negative real rates in the past explain a lot. I’m still skeptical about TIPS ETFs as a long-term holding, as the real rates will fluctuate, and I could effectively end up “sharing” the current attractive rates with new ETF investors. Thank you again for your valuable information and opinions.