Treasury Inflation-Protected Securities

By David Enna, Tipswatch.com

Last week, I noticed something very interesting: The real yield of the most recent 5-year TIPS fell on the secondary market at one point to 1.08% and closed the week at 1.10%.

CUSIP 91282CNB3 had its originating auction on April 17, 2025, generating a real yield to maturity of 1.702%. So its real yield has fallen a remarkable 60 basis points, at a time when the Federal Reserve has done nothing. The yield is falling in anticipation of possible substantial future cuts.

But that isn’t the most interesting thing, which is this: The real yield of a 5-year Treasury Inflation-Protected Security now exactly matches the fixed rate of the current Series I Savings Bond at 1.10%. That fixed rate is the I Bond’s “real yield” — its above-inflation return. After 5 years the I Bond can be redeemed without any penalty, making it a very close match to the TIPS, except that:

• Interest earned on the I Bond is tax-deferred. Not true for the TIPS unless it is held in a tax-deferred account. In a traditional IRA, the TIPS loses its state income tax exemption. That won’t happen with an I Bond.
• The redemption date is flexible — after 1 year with a 3-month interest penalty, or 5 years with no penalty, or any time period the investor chooses up to 30 years. The TIPS has a defined maturity date — in this case April 15, 2030.
• The I Bond continues to compound interest payments until it is redeemed or matures. A TIPS pays out its coupon rate twice a year, and so that amount does not compound.
• The I Bond cannot ever lose a penny of value, while the TIPS will lose accrued principal at times of deflation.

Conclusion: When an I Bond has a fixed rate of 1.10%, it is a superior investment to a 5-year TIPS with a real yield of 1.10%.

Shelter in the storm

I call I Bonds a “relic” investment because they have arcane rules for rate-setting that allow yields to stay steady for a full six months after any purchase. In addition, since yields are tied to inflation, I Bonds aren’t directly linked to market interest rate trends.

For that reason, when the Fed begins a rate-cutting cycle, I Bonds can become a very attractive investment. Even an I Bond with a 0.0% fixed rate — remember those? — will at least provide an annual return equal to U.S. inflation. That isn’t guaranteed for other investments in a time of severe rate cutting.

Here is a comparison of opening composite rates for I Bonds versus then-current yields for 26-week Treasury bills and 5-year Treasury notes over the last 10 years. For much of that decade, I Bonds had a superior yield.

Since May 2023, T-bills have had higher yields, leading many investors to move out of I Bonds and into T-bills. That decision makes sense as a short-term move, but the yields often have been fairly close.

Next week, the Federal Reserve is likely to lower its federal funds rate to a range of 4.00% to 4.25%, the first cut in rates since December 2024. That will move the effective federal funds rate to about 4.06%, just a bit higher than the I Bond’s current composite rate of 3.98%. As future cuts roll in, short-term rates are likely to fall below the I Bond’s yield, even if the November rate reset lowers the I Bond’s fixed rate.

In the chart, look at the yield comparisons from November 2016 through November 2022. For much of that time, the I Bond composite rate was higher — sometimes much higher — than the return of nominal Treasurys. This was the reason investors flooded into I Bonds through October 2022.

Why did I Bonds have an advantage? Because they track official U.S. inflation, often with a fixed-rate topper (currently 1.10%) that builds on top of inflation.

The joy of tracking inflation

Again, look at the chart: From July 2015 to July 2025, U.S. annual inflation has averaged 3.1%. All I Bonds issued over that period have had an average annual return of 3.31%, easily outperforming the average for the 26-week T-bill (2.05%) and 5-year T-note (2.39%).

If you bought a 10-year Treasury note on November 2, 2015, you received a nominal return of 2.20%, lagging annual inflation by 90 basis points. If you bought an I Bond on that same day, you’ve received a 3.15% annual return, matching inflation over the next 10 years.

For every I Bond rate reset since 2015, the annual return has matched or exceeded U.S. inflation except for one: I Bonds issued in May 2015 have had a return of 2.91%. The reason for the slight lag? The May 2015 I Bond started off with a six-month composite rate of 0.00% because of severe deflation over the preceding six months (-1.40% from October 2014 to March 2015).

The point is: Even I Bonds with a 0.0% fixed rate will out-perform nominal Treasurys in an era when the Federal Reserve cuts rates to a level below inflation.

For anyone asking, “Do I Bonds accurately track inflation?” this chart provides the answer. Since 2011, the I Bond’s inflation-adjusted variable rate (excluding any fixed rate) has exactly matched average annual inflation over that period, at 2.66%. During those years, the 4-week T-bill average yield has been 1.36%.

We won’t go back to zero, right?

Treasury Secretary Scott Bessent wrote an opinion piece for the Wall Street Journal last week criticizing the Federal Reserve for — among other things — its aggressive quantitative easing actions over the last decade-plus, resulting in abuses of “cheap debt.”

Successive interventions during and after the financial crisis of 2008 created what amounted to a de facto backstop for asset owners. This harmful cycle concentrated national wealth among those who already owned assets. … Instead of accountability, presidents and Congress have expected intervention when their policies falter.

I agree with Bessent that the Fed overstepped its mandate in launching repeated levels of aggressive quantitative easing — cutting short-term rates to near zero and forcing longer-term rates lower through aggressive bond-buying. Those actions — along with major fiscal stimulus from Congress and both Presidents Trump and Biden — opened the inflationary floodgates.

So … is there is any risk of that happening again? Over the next year, under current Fed leadership, I could see U.S. inflation hanging in the 3.0% range and the federal funds rate dropping to around 3.5%. That would be risky, but okay if inflation goes no higher.

President Trump, however, is moving aggressively to get a majority of his supporters on the Federal Reserve’s rate-setting Open Market Committee. Trump has expressed a desire to have interest rates lower by 300 basis points, which would put the federal funds rate in the 1.25% to 1.50% range.

That would almost certainly be inflationary and the bond market would be enraged. The result could be even higher medium- and longer-term interest rates, including for mortgages. The Fed can’t directly control those longer-term rates, unless it launches another round of quantitative easing to force them lower. Could that happen? I hope not. Let’s hope the “next” Federal Reserve remembers lessons of the recent past.

Conclusion

I Bonds — even with a 0.0% fixed rate — could be attractive as an alternative investment if inflation surges higher and bond yields again head toward zero. And even if that doesn’t happen, I Bonds will continue to offer a solid, predictable, and super-safe return.

Does this mean you should hang on to all those 0.0% fixed-rate I Bonds? No. I see the logic in rolling over low-fixed-rate I Bonds for higher-fixed-rate versions or other investments you consider attractive. I no longer own 0.0% fixed-rate I Bonds — those have been rolled over to versions with fixed rates ranging from 0.9% to 1.3%. Rolling over is a good strategy for some investors.

Whatever you decide, I Bonds remain an interesting, very safe, attractive investment when used as a secondary cash reserve.

• Forecast: I Bond’s fixed rate is likely to fall to 0.90%

• Confused by I Bonds? Read my Q&A on I Bonds

• Let’s ‘try’ to clarify how an I Bond’s interest is calculated

• Inflation and I Bonds: Track the variable rate changes

• I Bonds: Here’s a simple way to track current value

• I Bond Manifesto: How this investment can work as an emergency fund

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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.