Treasury Inflation-Protected Securities

• Bad news for holders of TIPS and I Bonds: Non-seasonally adjusted inflation fell 0.32% in December.
• Falling energy prices again accounted for almost all the decline in overall inflation.
• Core inflation remains moderate and steady at 2.2%.

The December inflation number is the third in a six-month string that will determine the I Bond’s new inflation-adjusted variable rate, which will be reset May 1. Three months in, we are looking at -0.48% inflation, which translates to a variable rate of -0.96%.

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Also, I have updated my Tracking Inflation and I Bonds page with the new numbers.

And here are the new February inflation indexes for all TIPS.

• Be patient: Because the I Bond’s fixed rate of 0.50% is locked in through April 30, there is no need to rush to purchase.
• Is a higher fixed rate possible in 2019? Yes, but the current trend doesn’t make that look likely. A lot can change, though.
• Should you redeem older I Bonds with a fixed rate of 0.0% and redeem at a higher rate? This makes sense for some investors.

With each new year, dedicated investors in U.S. Series I Savings Bonds face the inevitable question: When to buy? And this year, they might face an additional question: Should I buy?

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• The real yield could be about 1.12%, the highest after-inflation yield in nearly 10 years of 4- to 5-year TIPS auctions.
• The real yield curve has inverted, with the 5-year TIPS now yielding about 6 basis points more than a 10-year TIPS.
• The inflation breakeven rate is currently a very reasonable 1.60%, making this TIPS desirable versus a nominal 5-year Treasury, and still competitive with best-in-nation bank CDs offering 3.5%.

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