By David Enna, Tipswatch.com
As I noted in a post last week, the Federal Reserve’s recent moves to lower short-term interest rates haven’t caused real yields to decline. Instead, they have been rising.
Normally, the 5-year real yield will track lower or higher to match the Federal Reserve’s rate decisions. The 5-year is the shortest term of auctioned TIPS and so its yield generally follows along with the Fed’s December decisions on short-term rates. But not this year. The 5-year real yield has increased 7 basis points since December 1 and 3 basis points since the Fed’s announcement on December 10.
All of this is leading up to Thursday’s offering of $24 billion in a reopened 5-year Treasury Inflation-Protected Security – CUSIP 91282CPH8 – creating a 4-year, 10-month TIPS. This TIPS has a coupon rate of 1.125%, set at the originating auction on Oct. 23, 2025, which generated a real yield to maturity of 1.182%.
CUSIP 91282CPH8 trades on the secondary market, where it closed Friday with a real yield of 1.40% and a price of 98.73. The price is discounted because the current real yield is higher than the coupon rate of 1.125%.
It’s important to point out that the real yield of this TIPS has increased 22 basis points in two months, during a time the Federal Reserve was cutting short-term interest rates by 50 basis points. That’s remarkable.
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 1.40% means an investment in this TIPS would provide a return that exceeds U.S. inflation by 1.40% for 4 years, 10 months.
Is a real yield of 1.40% attractive? Historically, yes, but it is well below the high of about 2.51% set in October 2023. Here is the trend in the 5-year real yield over the last 15 years:
Pricing
CUSIP 91282CPH8 closed Friday with a price of 98.73, and it will carry an inflation index of 1.00653 on the settlement date of Dec. 31. With that information, we can estimate the cost of a $10,000 par value investment at Thursday’s auction.
- Par value. $10,000.
- Principal purchased on settlement date. $10,000 x 1.00653 =$10,065.30
- Cost of investment. $10,065.30 x 0.9873 = $9,937.47
- + accrued interest of about $23.95.
In summary, under current market conditions, on the settlement date the investor would pay about $9,937 for about $10,065 in principal. From then on, the investor would earn accruals matching U.S. inflation, plus a coupon rate of 1.125% on inflation-adjusted principal for 4 years, 10 months.
This is an estimate. The market pricing will change by Thursday, but this can give investors an idea of the likely outcome.
Inflation breakeven rate
With the 5-year Treasury note closing Friday with a nominal yield of 3.75%, this TIPS currently has an inflation breakeven rate of 2.35%, a bit below recent auctions of this term. It means this TIPS will outperform the nominal Treasury if inflation averages more than 2.35% over the next 4 years, 10 months. (I’d take that bet.)
Note, however, that non-seasonally adjusted inflation could be near zero or slightly negative for November and December. This is the normal pattern for non-seasonally adjusted inflation. Don’t be alarmed if you see that.
Here is the trend in the 5-year inflation breakeven rate over the last 15 years, showing the strong surge higher in 2022 and more recently, a slight dip:
Thoughts
One of the positives about a 5-year TIPS is: the term is short, and this auction’s 4-year, 10-month term is the shortest of any TIPS auction. Because of that short term, holding to maturity is easier, and this TIPS should be a good investment if held to maturity.
At the current real yield of 1.40%, it will outperform the U.S. Series I Savings Bond, which currently has a fixed rate of 0.9%. It also looks competitive versus best-in-nation 5-year bank CDs, currently yielding around 4.0%, which would push the breakeven rate up to 2.60%. The TIPS gets the advantage of protection against a surge in inflation.
I wouldn’t be surprised to see some rate volatility next week, so real yields could be rising or falling. CUSIP 91282CPH8 can also be purchased at any time on the secondary market.
The advantage of buying at auction, especially through TreasuryDirect, is that even small-lot purchases will get the auction’s high yield. The advantage of the secondary market is that you can see exactly the price and real yield you will be receiving. The negative is that you may face a small bid-ask spread. Most of the time, it doesn’t make a huge difference, but if you see a real yield you like, know that you can probably get it on the secondary market without dealing with the auction’s uncertainty.
Investors can track the market shifts for this TIPS in real time on Bloomberg’s Current Yields page. And here is advice for secondary market investors.
A couple of side notes about this auction:
- The size of $24 billion is the largest in history for a 5-year TIPS reopening, up from $23 billion at the April reopening and $22 billion last December.
- The inflation index of 1.00653 includes the result of the “synthetic” inflation calculation for October 2025. More on that here. Not a huge deal, but that number is almost certainly slightly off target. This will autocorrect as future inflation reports are issued, including the November report coming on Dec. 18.
- For the first time I know of, this auction will close just a few hours after the release of the November inflation report, which was delayed from Dec. 10. That’s never happened before. The results of that report could influence the auction result.
This TIPS auction closes Thursday at 1 p.m. EST. 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 will be reporting the auction results soon after the auction’s close at 1 p.m. and of course I will be writing about the November inflation report, to be issued on the same day at 8:30 a.m. EST. Here are results for recent auctions of this 4- to 5-year term:
• 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 
From what I found in NJ income and gains only are considered for taxation on Traditional IRA distributions, since the contributions were taxed, but the rules on 401ks follow federal and therefore the full distribution on Rollover IRAs should be taxable since the contributions were exempt.
But again consult with a NJ expert or do your own research to your satisfaction.
thank you
I made a modest purchase in my IRA for this issue.
I decided to buy some of this in my ira but had a thought. In my state, NJ, interest from treasury is tax free, so is the phantom income not included on NJ taxes? . If I buy it in my IRA, as I did, the full amount is taxable, federal and state when I take it out. Does it matter where I purchase it? IS it mostly a wash?
I live in Maryland, with state and local income tax rate around 9%. To my knowledge, TIPS in an IRA account are not free of MD state tax when distributed. I have read that in some states there is a way to retain the tax benefit in the IRA account, but don’t know any details. It seems it would complicate tax preparation more than a bit!
It probably depends on if your state taxes IRA withdrawals (most states with an income tax do, including Maryland). In a traditional IRA, most of the time, all withdrawals are subject to federal and state income taxes. So in some high-tax states, the case could be made to hold TIPS in a taxable account, where the state tax would not apply.
5Flavors: I promised myself I would not go down this rabbit hole, but I read enough (on the NJ government website) to believe that US government interest is not taxed by New Jersey when part of an IRA distribution. I’m not a tax advisor, so as they say, consult your tax advisor 😊
thank you!! Would probably be a documentation nightmare. As with most things I do fininacially, may just do a little of both. Not all right but not all wrong.
It appears to me that bond rates are trickling in an upward direction lately.
On another note, going out and seeing how and what folks are buying in droves, looks like China manufacturers are having a very nice Christmas.
I inadvertently ordered an item that I later found out was being shipped from a warehouse in China. All kinds of dark scenarios played out in my mind, but it arrived within a week with no tariff due.
Are we going to get real inflation calculations the next three years? David, might it be better to postpone purchases?
So far, the statistical nerds are still in charge at the BLS and I would trust their work. One very bad inflation report could change all that, I suppose.
Not at all unappealing but my 2030 allocation is pretty full with an average real yield of about 2%. I’m preparing to address the light 2036 rung.
Surprised there seem to be no comments yet! I hadn’t been planning to be a buyer but having had two substantial agency bonds called recently, I might jump in.