By David Enna, Tipswatch.com
One morning last week on Bloomberg, a fixed-income analyst was asked about the effect of a 5% nominal yield on a 30-year Treasury bond. He said: “Then you’ll see bond investors attacking like seagulls in Finding Nemo.” (See Nemo video)
I must have seagull instincts. A 30-year nominal cracking 5% doesn’t particularly interest me, but I was curious about real yields for the top end of my ladder of Treasury Inflation-Protected Securities, years 2040 to 2043.
So I flocked in. When I built this ladder, mostly in late summer/fall of 2023, I didn’t quite fill out the years 2041 to 2043, mainly because of very high existing inflation accruals on those TIPS, which means buying a lot of additional principal.
In mid-April and then last week, I completed the top end. I thought it would be helpful for me to explain how each transaction worked.
April 14: CUSIP 912810QP6
This TIPS matures Feb. 15, 2041. I own one portion at TreasuryDirect (bought at the original 2011 auction with a real yield of 2.190%) and another portion in a traditional IRA, bought in fall 2023 with real yields of around 2.20%.
- Par value: $7,000
- Coupon rate: 2.125%
- Inflation factor: 1.4885
- Adjusted principal: $10,419.50
- Price: 98.27343
- Cost of investment: $10,239.60
- Real yield to maturity: 2.263%
For this purchase, I was looking to add $10,000 to 2041’s accrued principal, bringing it to my target level for each year of the ladder. Because of the large inflation accrual, I placed a par-value order for $7,000 to get the result of $10,419.50 in adjusted principal, at a cost of $10,239.60.
I like this TIPS, which I will hold to maturity, because I appreciate having a 2.125% coupon rate creating cash flow through the next 15 years. The next two TIPS don’t have that same coupon-rate advantage, however.
May 5: CUSIP 912810QV3
This TIPS matures Feb. 15, 2042.
- Par value: $8,000
- Coupon rate: 0.750%
- Inflation factor: 1.448665
- Adjusted principal: $11,589.20
- Price: 77.57812
- Cost of investment: $8,990.68
- Real yield to maturity: 2.475%
I spent $8,990.68 to add $11,589.20 in principal, bringing the total to my goal. The yearly cash flow isn’t great at 0.750%, but this is the way it works — there is only one TIPS maturing in 2042. This is the only option. The real yield to maturity of 2.475% was well above my original 2023 purchase at 2.105%.
May 5: CUSIP 912810RA8
This TIPS matures Feb. 15, 2043.
- Par value: $10,000
- Coupon rate: 0.625%
- Inflation factor: 1.42376
- Adjusted principal: $14,237.60
- Price: 74.14843
- Cost of investment: $10,556.96
- Real yield to maturity: 2.525%
This TIPS had the biggest gap to my yearly target amount, so I was looking to add $14,000 in principal, which required purchasing $10,000 par value at a cost of $10,556.96. The real yield of 2.525% was well above my 2023 purchase at 2.203%.
Deflation risk?
I get a lot of feedback from readers who are very resistant to purchasing inflation-adjusted principal above par value, even at a discount. The reason: A TIPS is guaranteed to return only par value at maturity, and that means any amount above par value is exposed to risk of deflation, meaning principal would decline.
Yes, it is a risk. But as I noted in this article, “Don’t over-think the potential threat of deflation,” the risk is much greater short-term than long-term.
Since 1971, the lowest average annual inflation for any 5-year period was 1.4%, for the 5 years ending in both 2017 and 2018. For 10-year periods, the lowest was 1.6%, for the years ending in 2017. For a 30-year period, the lowest was 2.2%, for the years ending in 2020.
So if you are buying a TIPS on the secondary market with a high inflation index and 15 years remaining to maturity, you can be fairly confident you won’t be struck by a 15-year period of deflation, eating away at your above-par investment.
Since 1971, there has not been a single deflationary year ending in December. The lowest inflation rate was 0.1% in 2008.
And keep in mind that every single TIPS you are holding at the moment has an inflation accrual above par value.
Sense of completion
These are fairly small investments, not life-changing in any way. The three purchases will allow me to focus on future purchases of TIPS maturing in 2037 to 2038.
Last week, I had an interesting question from a reader:
In deciding upon the ending year for your target range do you include additional years your beneficiary may hold the account after your own death? I am currently thinking for TIPS held in a Roth wrapper account that 10 years beyond my expected death would be a reasonable year to select and that a 10 year rolling TIPS ladder could be a great fit and allow the beneficiary to hold all the TIPS in the Roth account to maturity if they wish.
I can’t argue with that premise, as long as the beneficiary is a responsible person who could take directions and understand how TIPS work. My wife and I have no children, so beneficiaries aren’t a great concern.
Will I live to that last maturity in 2043, when I will be just months from 90? It’s certainly possible, but maybe not likely. I definitely think my wife could live to 90 and she has financial smarts. But around age 90, who wants to be managing a TIPS ladder?
Let’s face it: TIPS are a complex and intimidating investment. I was talking to a Wall Street Journal reporter a week ago who told me that a co-worker, very skilled at financial journalism, doesn’t get TIPS at all. We laughed. But that’s the norm. I hope this article provides helpful information on purchasing TIPS on the secondary market.
The complicated nature of TIPS is why a lot of sophisticated investors prefer I Bonds, despite the lower real yield. I Bonds have advantages of tax-deferral, rock-solid deflation protection, and a flexible maturity. They can never go down in value, unlike a TIPS. I Bonds and TIPS make a good combination.
Here is the Wall Street Journal video:
• 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 
Thank you for this valuable resource !
I am confused by one little thing in your 2043 example: When you say “so I was looking to add $14,000 in principal, which required purchasing $10,000 par value”, the principal about ($14K) is that meant to convey today’s $$ or estimated 2043 $$.
So far I’ve been thinking the expected Principal targets are today’s $$ (given purchase strength etc). But when I look at the Fidelity descriptions, the “Today’s value” numbers do NOT reflect the high inflation factor multiplication and are close to the Par value.
Any guidance on how to think about this correctly ?
The $14,000 is in 2026 dollars and in 2043 the payout will be in inflation-adjusted dollars. The “market value“ you see is based on fluctuations in real yields, not directly the underlying principal. At maturity, you get par value x inflation index, which is the closing principal value.
Wrestling with an option to fill out either the 2041 leg or the 2035 leg (YTM ~1.9%) of my ladder – aiming for the same current adjusted principal a of today for both, the high inflation adjustment that reduced bottom line protection (par value) of the 2041 is making a lot of discomfort.
Given only one option for 2041, I guess one takes a deep breath and jumps in ? What would you recommend ?
Thanks for this post! I dabbled into building my TIPs ladder in 2024 after finding your site and all the tremendous info that you share. Through 2025 and 2026, I added rungs at auction (’35 & ’36) and have ’32-’36 filled. My strategy for TIPs was to fulfil required RMDs of my IRA starting in 2032. However, I was always hesitant to build the years ’40-’44. (’37-’37 will be added at auction when available)
For whatever reason, the optics of buying the ’40 & ’41 rung was always a psychologically barrier. Paying so much more (50%) than par value for the bond made me hesitate.
As a result of this post, I reviewed my “issue” further. After some research and analysis, I understand the concept of “purchasing inflation adjusted principal above par” much better. As a result, I purchased the ’40 & ’41 rungs along with’42-’44 rungs today. I’m pleased with YTM ranging from 2.276 (’40) to 2.593 (’44). And more importantly the comfort of getting the ladder more fully filled.
This will work out well as long as you hold to maturity and refuse to fixate on market value. There will be some crazy swings over the next 15 years, I am sure.
These last few months have offered us some really nice real yields above inflation on the longer dated Tip bonds for sure.
I bought a TIPS last week too. It was my first-ever purchase on the secondary market: CUSIP 912810RR1, maturing 2/15/2046 with a real yield of 2.6445535% (that’s my own calculation, since Schwab didn’t exactly tell me what yield I got, or I haven’t found it if they did). The coupon rate is only 1% so I got a pretty nice discount.
I am happy with this purchase, but a little bewildered by some of the information in the “position details” for this TIPS. I don’t think I need to worry about most of these details too much, though, since I intend to hold it until maturity. This stuff seems to be mostly geared toward if I wanted to sell it again.
Schwab does seem to hide the exact YTM for TIPS, but I’ve found it in the past so it is there somewhere. It’s not in the transaction history, which would be a logical place to put it. It might be in the trade conformations, which they only keep accessible for a couple of days I think. Try looking there on your next purchase.
At Vanguard, I can see the real yield on the purchase page, just before I order. So I always make note of that, often taking a screenshot. It shows all relevant details. Later, when the confirmation rolls in, it also has a line showing the real yield and principal purchased. This was for the 2043 TIPS I wrote about: ADJUSTMENTS TO PRINCIPAL; INFLATION FACTOR IS 1.42376; ADJUSTED PRINCIPAL IS 14,237.60; YIELD 2.525% TO
MATURITY
Thanks, I’ll keep my eyes open for that. I’ve looked about every place I can think that it might be, but have not found it. I received an email from Schwab the day after, and a trade confirmation PDF, but neither of these shows the YTM or the principal purchased. I can compute most of the numbers I need, but it would be a little more reassuring if I could also see them in my account.
I am a dedicated I-bonder and to a lesser extent EE-bonder. TIPS are interesting and confusing. I have avoided them but may dip into them at some point to understand what all the fuss is about. The negative sentiment toward long term nominal bonds is intriguing– no doubt for good reasons such as rising inflation, national debt, and the recent memory of 2022 when they were killed. It suggests investors believe we are in a long term bear market for bonds, wanting to avoid the risk. Vanguard fixed income commentary calls the long end of the curve “steep and cheap.” Long term treasury mutual funds pay around 5%; strips (bearing the highest risk) pay more than that. Long term investment grade bond funds pay 5.5-5.8%. Compare that to the S&P index, which yields around 1%. Are they a buying opportunity? A bond mutual fund would certainly be easier to manage than a TIPS portfolio as I age and possibly experience some cognitive decline.
This discussion also has people reflecting on their mortality. I have wondered when to stop buying EE bonds because they only make sense if you can hold them for the 20 year doubling in value. According to government data, if you are a man in the USA and have attained the age of 65, your average life expectancy is 83. Women live on average 5-7 years longer than men. Very few of us (< 1%) will reach the age of 100.
There’s also the unconscious fantasy of immortality, written about by Sigmund Freud and the psychoanalysts last century. Death and the end of one’s existence is too terrible a reality to contemplate, and so the unconscious mind can never accept it.
I have been been ridiculously healthy my entire life … probably missed 30 to 40 days of work in my lifetime. So … I always say, “I am due for the big one!” Yeah, eventually … but not yet.
EE Bonds are paying 2.4%, which might be less than most CDs but is comparable or better to most bank money market accounts. So there still could be a place for EEs.
In the 1990s 30 year rates were largely 6-7%, with inflation running roughly 3% on average. So is a 5% rate a good rate today or not?
The higher 30-year yields of the 1990s were probably in reaction to the extreme inflation of earlier years. Annual inflation ran at 13.3% in 1979 and then 12.5% in 1980 (compare that to 2021’s 7.0%). Then we got the “Volker years” (1979-87) of an aggressive war on inflation. I think things changed dramatically beginning around 2010, the era of Fed activism to avoid a recession. The gap between the 30-year yield and U.S. inflation narrowed dramatically in 2016 and then actually reversed from 2020 to 2023, with the inflation rate much higher than the 30-year yield.
I would say 5% is a good rate (for the Treasury) but not spectacular for investors. I’d rather have inflation protection.
If 30 year rates in the 90s were a result of higher rates in the 80s, couldn’t the same logic apply to the present? That is, the current long rate is perhaps understated due to the recent history of very low rates?
We really won’t know until the future happens, but the normalization of rates after the long period of ZIRP is underappreciated. People tend to remember the recent past and think prior history doesn’t apply. It might or it might not!
I’m not sure how many readers are moms, but Happy Mother’s Day to all. I’m one of those people who prefer I Bonds for the reasons you stated. The WSJ video didn’t do a bad job explaining them and “quirky” is a good adjective to describe them. It made me wonder, who was sitting around a table when they were invented and how they decided there would be a 3-month interest penalty for selling them after one year and before five years. I can’t think of another investment where there is such a rule. Have you ever written a history of how the I Bond was created and the reasons for its “quirky” rules? If not has anyone? The origin story of every superhero is always the most interesting one.
The same rules apply to EE Bonds. According to my buddy Claude, that rule was instituted for all savings bonds in May 1997, before I Bonds were launched. Treasury Secretary Robert Rubin said the idea was “to encourage longer-term holdings of savings bonds, there will be a three-month interest penalty if a savings bond is redeemed within the first five years.” I get it. The savings bond program was created as an incentive to build long-term savings.
I presume the I bond interest penalty came from bank CDs, which also have redemption penalties ranging from 3 to 12 months. Most people never redeem them early and therefore never see that feature.
I bougth the 5 year TIPS in the last auction, instead of I-bonds as the real yield was higher. Do you have any rule about when is it better to buy ibonds vs tips? I usually buy for ibonds in April, but this time 5 year TIPS looked better.
I invest in both, and I think of I Bonds as a super-safe, inflation-protected cash alternative with a flexible maturity date. For TIPS, I know I will hold to maturity so it is a matter of stacking purchases to create cash flow in specific years. I think the 0.65 ratio is a pretty good indicator that I Bonds are attractive, versus the 5-year TIPS. The TIPS yield is currently 1.40% and the 0.65 ratio gets you to 0.91%. So that’s a fairly even balance. The long-term TIPS have a much higher yield advantage.
TIPS are a complex and intimidating investment.
The underlying equations are certainly complex, but I bought a TIPS ladder to simplify and de-risk my financial life.
Every year, a TIPS matures, and I get an inflation adjusted check with a real return of only 1-2%. Not much, but it’s what I need to live well (when added to my Social Security check, also inflation adjusted).
My ladder goes to age 100. I don’t expect to live that long, so my kids will get whatever is left (in addition to the non-TIPS stuff). I’ve missed out on the recent stock market “gains” with the TIPS, but my view is that I have already won the game; I don’t have to play any more and risk injury. My longer term TIPS have paper losses, but I have no intention of selling them and I know what I will get when they mature.
Am I missing something?
No, you are correct. Understanding and then buying TIPS can be confusing. But once you get the ladder built, TIPS can be a set-it-and-forget-it investment (except RMDs in a tax-deferred account can create problems if you aren’t careful). I personally don’t care about the “market value” of my TIPS, just the accrued principal. But let’s say a beneficiary suddenly inherits a TIPS ladder worth $100,000. There would be a huge temptation to just sell it and spend or reinvest the money.
But how do you determine (and adjust) your AA if you don’t periodically add up the current value of you TIPS?
If you hold a TIPS at TreasuryDirect, you will never be shown “market value” … just par value x inflation index on the date of the last coupon payment. It is a legitimate way to look at value. I wrote about that here: https://tipswatch.com/2025/02/02/the-unique-serenity-of-holding-tips-at-treasurydirect/
However, my TIPS holdings at TreasuryDirect are dwindling and the vast majority are in a traditional IRA at Vanguard. The brokerage does show market value, which is needed for calculating RMDs. The Vanguard number is the one I use for asset allocation. In many cases, the Vanguard market value is below the par value x inflation index. That all works out at maturity.
I am wondering if a ladder of iShares TIPS ETFs (e.g. IBIJ) might be easier for a surviving spouse to understand, hold and utilize than a TIPS ladder. It seems like the relatively stable value and generally rising annual income stream from them would provide a degree of security later in life, plus the tax reporting is more straitforward.
Yes, that will work but only for 10 years out. iShares has now released IBIM, which matures in 2036. These funds have very low expense ratios and pay out inflation accruals as current income, which might make sense in your case. I will probably write about IBIM this week or next.
With the high deficit, Who knowns what will happen in the 2040s
Question, why do TIPS on the secondary market have such unattractive, low yields. For example 91282CJH5, I purchased this at auction in October 2023 with a 2.44% YTM. Just looked on Schwab on the secondary market and this same TIPS has a YTM of 0.923%. Not even close to current yields. Current Yield on a 5 year TIPS is 1.40%
That matures in October 2028 and I think the market is pricing in high inflation (at least 3%) over the next two years. The inflation breakeven rate is about 3%. A short-term TIPS will often be priced in line with nominal Treasury of the same term. By comparison, inflation expectations are lower (2.6%) for the 5-year term, so the 5-year TIPS gets a higher real yield — 1.4% vs. 4% for the nominal Treasury.