Treasury Inflation-Protected Securities

Do you agree? Probably not. But high interest rates benefit savers.

By David Enna, Tipswatch.com

Let’s step back in time, to 1965: I was 12 years old and folks from a nearby Savings and Loan came into my classroom to encourage students to open a “passbook savings account.” They even gave us neat little folding books to store dimes and quarters to build up the first deposit.

The passbook accounts are a thing of the past, but in the 1960s they generally paid an interest rate of 5%, and in fact were capped at 5.5% through the mid-1980s. I opened the account — with 5% interest — but I saved a few books of dimes and quarters and still have them stashed away. All of these coins were the silver versions, now worth much more than face value.

So … 5%? At the time, I wasn’t impressed. Sixty years later, I’d jump for joy over 5% interest.

And that’s my point: Current Treasury interest rates aren’t historically high, hovering around 4.3% for much of the nominal yield spectrum in July 2025. That’s close to the effective federal funds rate of 4.31%, which may begin declining soon, probably slowly down about 100 basis points over 12 to 18 months. This chart shows that today’s short-term interest rates are fairly normal, or even low, historically:

President Trump is lobbying for a 300-basis-point cut in the federal funds rate, which would bring it to about 1.3%. I am not sure that is a serious proposal, but the president will have a lot more say about that next year, when he names a new chairman of the Federal Reserve.

What would be the result of dramatically lower short-term interest rates?

• The yield curve could steepen, with short-term rates falling and longer-term rates potentially holding stable, or declining far less.
• Financing the federal deficit would be much less expensive, especially if the Treasury shifted its issuance to short-term T-bills.
• The housing market could get a boost, if mortgage rates fell. But there is no guarantee of that, since the mortgage rates are generally tied to the 10-year Treasury note.
• Credit card interest rates would likely fall (the current average is 21.4%), but would probably remain well above 15%.
• U.S. economic growth could get a boost.
• U.S. inflation would very likely increase.

We are in an era of very high U.S. government borrowing, continuing over the next decade. Longer-term Treasury rates — and the linked mortgage rates — aren’t likely to fall dramatically unless the Federal Reserve launches another era of bond-buying quantitative easing. That would be disastrous, in my opinion.

Is inflation low enough to justify greatly reducing the federal funds rate? U.S. inflation is currently running at an annual rate of 2.7% — above the 30-year average of 2.5%. Today’s inflation could justify a small, gradual cut in rates, but nothing more, in my opinion.

High rates benefit savers

My point of view on this issue comes from being a life-long saver with no debt and a cash reserve to fund my needs in retirement. So, yes, maybe I am an outlier. For much of the decade from 2011 to 2022, I was earning about 0.05% on my cash. Today, I can earn 4%+, which amounts to a sizable boost in income. For example, in 2020 my cash holdings at Fidelity paid $5 in interest. Last year that rose to more than $3,000.

In addition, the surge in real interest rates in 2023 allowed inflation-wary investors to build holdings in Treasury Inflation-Protected Securities, which can provide a guaranteed inflation-protected withdrawal rate for the future. The 10-year real yield rose from -0.97% in January 2022 to over 2.0% in December 2023.

Do the math. Let’s assume you have a portfolio allocation of 60% stocks and 40% bonds, a common allocation for people in or nearing retirement. Here is how lower interest rates would affect the interest payments coming from the bond allocation:

For a person with $1 million in investments, a 300-basis-point drop in interest rates across all maturities would result in $12,000 less in current annual income. On the other hand, the value of the investor’s bond funds would increase as interest rates fell. So in reality a 300-basis-point drop would hurt more if you are holding sizable cash reserves, a typical allocation for people in retirement.

I Bonds and TIPS. In times of very low interest rates due to Federal Reserve manipulation, TIPS can have negative real yields, meaning the investment is guaranteed to under-perform inflation. That is undesirable, but is in line with nominal yields, which will also lag inflation.

I Bonds are a much better option, because at the very least they will match future inflation, even with a 0.0% fixed rate. In mid-2020, when the 4-week Treasury bill was paying 0.11% (on a good day) I Bonds had a variable rate of 1.06%, about 10-times higher.

Conclusion

While falling interest rates would offer benefits to U.S. consumers, they would also enforce a lost-opportunity cost for savers and people holding cash reserves in retirement.

I am not suggesting that the Fed should increase interest rates. As I said, I think short-term rates could fall up to 100 basis points in the next 12 to 18 months, if inflation remains under control. My ideal is to have short-term interest rates running higher than inflation. If inflation begins to rise, rate cuts will be potentially destructive.

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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.