Answer: Very well, in keeping with recent trends.
By David Enna, Tipswatch.com
Back on July 23, 2015, the U.S. Treasury auctioned a fairly routine 10-year TIPS, CUSIP 912828XL9, generating a real yield to maturity of 0.491% and a coupon rate of 0.375%.
That’s a low real yield by today’s standards, but fairly normal during the Federal Reserve’s era of bond-buying quantitative easing. A real yield of 0.491% was actually a nice step up from the negative-yield depths of 2012 to mid 2013.
In my preview article for this auction, I noted, “This auction is shaping up as ‘upper middle of the recent pack.’ Not exciting, but also not horribly unattractive.”
Inflation breakeven rate. At the auction’s close, a 10-year nominal Treasury note was trading with a yield of 2.29%, setting up an inflation-breakeven rate of 1.79%, which I noted back then was “solidly in the ‘cheap’ range for a 10-year TIPS.”
Now, 10-years later, that low inflation breakeven rate made CUSIP 912828XL9 a very attractive investment, at least compared to the nominal 10-year Treasury of the time. Annual inflation over that decade averaged 3.1%, well above the inflation breakeven rate. The TIPS was easily the superior investment.
The final investment results for this TIPS were set by the May inflation report released June 11. Data from Eyebonds.info show this TIPS generated a 10-year nominal annual return of 3.529%, easily exceeding the comparable T-note at 2.29%.
For its time, CUSIP 912828XL9 was a very good investment.
TIPS versus an I Bond
An I Bond issued in July 2015 had a fixed rate of 0.0%, which means its return should be lower than a TIPS with a real yield of 0.491%. According to Eyebonds.info, that July 2015 I Bond will have had, through January 2026, an annual nominal return of 2.91%. That is better than the nominal Treasury at 2.29%, but lags behind the TIPS.
TIPS versus other alternatives
The total bond market, defined by Vanguard’s Total Bond ETF (BND), has had an average annual return of 1.69% over the last 10 years. This lagging performance was primarily triggered by a -13.1% total return in 2022 as the Fed began aggressively raising interest rates.
The TIP ETF, which hold all maturities of TIPS, has had an average total return of 2.49% over the 10 years. VTIP, the short-term TIPS ETF, had an average return of 2.84%.
Thoughts
There is an obvious lesson here: TIPS do well when inflation is higher than expected, and that is exactly why we invest in TIPS — to protect against that possibility. When compared to similar investments, buying this 10-year TIPS in July 2015 and holding to maturity was a sound move. (I nibbled into this TIPS with a very small investment at the July 2015 auction.)
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 (2.4%) is running higher than the auctioned breakeven rates of 2015. And so TIPS have been the winners versus nominal Treasurys in recent years.
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
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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 – Do you think that the 5% and near 5% rates on the long bonds are dangerously high?
No, but I think 5% nominal rates on the 10-, 20- and 30-year Treasurys would be attractive. You want a return 2% above inflation, the historical standard for longer-term Treasurys. Inflation is currently 2.7%, so today’s rates are not out of line. Here is a chart showing the 10-year note’s nominal yield from 1990 to 2025. About a third of the time the rate was above 5% and half the time the rate was above 4%, until the financial crisis of 2008:
almost risk free income?….
For my taxable account I am thinking of buying 20 year nominal bonds at auction. My goal is to collect income from these bonds. I am good with holding them for the long-term as well as all the volatility between now and 2045, because I will hold these bonds to maturity.Also, I believe that US will find ways to keep the dollar king. Do you think this makes sense or are there better ways to create almost income?…thanks for your thoughts
I can’t argue with this strategy, which is somewhat similar to buying 20-year TIPS to hold to maturity. But TIPS are more of a future-spending needs strategy, while the interest on nominals creates year-to-year income to spend. I don’t tend to hold a lot of bonds in my taxable accounts, except for cash needs.
Thanks David, it makes me feel more confident. Again, the purpose of the bond interest is to provide for living expenses and travel. I will certainly try to compound the interest if there is any left after covering expences.
So, the big question in my mind is when to buy. My current focus is on August 14th, 20 year bond auction because it is a new, and not reopend, with close to par value buying. Timing to get the best interest rates is hard to impossible. If I can get 5% that will be awesome, I will be happy with anything above 4.9%. I do track almost all that may impact long-term rates. Any additional words of wisdom will be very much appreciated….thanks a million!!!!
I believe that is great capital preservation and peace of mind return for us old folks. But, if you are in your prime working years (young and healthy) you need to make money first. According to AI, Since the beginning of 2015 to the end of 2024, the S&P 500 has seen an average annual return of roughly 12.21%. and when adjusted for inflation, the real return is closer to 159.40% cumulatively, or 9.58% per year. Investing a fixed amount regularly (like monthly) would have yielded a slightly lower return of $336.89 for every $100 invested according to AI today.
Since we have entered the twilight zone of tariffs, prices can increase in big increments with no significant increase of the benchmark inflation. Just think if you put into Tips for 15 years to keep buying power for vacation. New auto or home today.
Could you please explain this? Are you saying that even if tariffs cause prices go up, the benchmarks used for TIPS and other inflation reporting won’t pick this up? That would be a scary outcome because TIPS would no longer maintain buying power.
IMHO, breakeven rates are highly overrated. The only relevance is which is the better value under the assumption that you MUST buy one of the 10 yr bonds offered at that specific point in time. If you have the option as to how to allocate your wealth, why buy long duration fixed rate bonds when yields are so low and lock yourself in? A good example, though not not exactly the same case (MBS have longer maturities) us Silicon Valley Bank
The reason: In July 2015, the 4-week T-bill was paying 0.01%, and your money market account was yielding maybe half that, essentially zero. Investors were being forced into risk. So investors seeking safety had very few options for any significant return. At least this TIPS (and I Bonds as an alternative) paid a return equal to or above inflation.
I guess it’s a personal matter of risk tolerance, especially if you’re investing in a taxable account. During these years, I waited things out in online bank money market funds and accepted meager returns. Today, given the uncertainty due to US overindebtedness, TIPS look much better to me than nominal bonds. I only buy them in non taxable accounts.
keep up the great work!
I would be reluctant to buy 10 yr TIPS if they did not pay rates comparable to real historical rates on 10 yr Treasuries. I think this might be something like 2%. Is there a better strategy such as staying in short term TIPS or Treasuries and waiting for a better opportunity?
FWIW when I look back at my 2015 planning, I was using a switch strategy between 5 yr investment grade bonds and 5 yr Treasuries (using bond funds VFIDX and VFIUX). I started buy 5 yr TIPS a few years later when they were at around 1%. I really struggle with bond strategy although current TIPS rates make the planning easier for the present.
I really appreciate this site and the work David puts into it.
Yes, the current 10-year real yield is 2.06%, which is historically attractive. (A new 10-year TIPS will be auctioned July 24.) The years 2011 to 2018 were very difficult for investors looking for safety and a reasonable return. I generally didn’t buy TIPS or I Bonds in many of those years — or bought small amounts like I did for this one in July 2015.