Treasury Inflation-Protected Securities

• Inflation over the last 10 years has averaged just 1.8% a year, much lower than investors were predicting in 2010.
• Investing in Treasury Inflation-Protected Securities is a “bet” that inflation will run higher than expected, or at least match expectations.
• TIPS have consistently underperformed nominal Treasurys in the last decade because inflation remained stubbornly low.

I’ve been writing about inflation-protected investments – Treasury Inflation-Protected Securities and U.S. Series I Savings Bonds – since 2011, and I’ve been investing in these products since 1999. So today I am going to take a look at how these investments have been doing. The answer is: Not so well.

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• The real yield came in 19 basis points below a similar reopening auction in November 2018, just two months ago.
• The inflation breakeven rate of 1.82% was the lowest for this term since an auction in September 2017, a positive for investors.
• End result: No surprises, because the real yield came close to the Treasury’s real yield estimates of the last two days.

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• The trend is pointing toward a real yield to maturity of around 0.88%, down substantially from levels in November and December.
• The inflation breakeven rate is currently at 1.83%, a favorable number that should boost demand for this new TIPS from big-money investors.
• Think interest rates are heading lower? Then buy this TIPS. Otherwise, patience.

A few months ago, I had targeted this new 10-year TIPS as a purchase, in the hopes of a real yield and coupon rate of at least 1.00%. In “normal” times, a 10-year TIPS offers the sweet spot of a higher yield than shorter terms and a reasonable term to hold to maturity. It is the perfect term for building a ladder of bonds stretching 10 years into the future.

But ….

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• 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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