Treasury Inflation-Protected Securities

• Advice: Do nothing for three months.
• The current 2.76% variable rate is at risk, but the current fixed rate of 0.0% is too low.
• It’s a waiting game: Watch the variable rate trend and hope for a higher fixed rate later in 2017.

U.S. Series I Savings Bonds are a boring, ultra-conservative investment that somehow drive many people – including a lot of very wealthy people – to scheme over buying strategies and fret over single basis-point rate swings. The key strategy is to buy them every year, up to the Treasury limit. But the question is: When?

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• TIPS yields started and ended the year at relatively high levels, but dipped at midyear.
• TIPS outperformed the overall bond market as inflation expectations rose, increasing demand for TIPS and softening increases in yield.
• Are today’s higher yields a head-fake, or a signal of buying opportunities to come?

Treasury Inflation Protection Securities had a promising beginning of 2016 for investors, then a serious slump in yields at midyear, and then a promising rise in yields again after the November elections.

What can we expect in 2017?

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• A bear market for Treasury Inflation-Protected Securities? Not based on this auction, which generated strong demand.
• The coupon rate of 0.12% fell just below the coupon rate of 0.125%, meaning buyers had to pay a small premium for this TIPS.
• TIPS have been out-performing the overall bond and Treasury markets over the last week. Inflation protection is still ‘in’.

TIPS have been on the move this week, with yields falling and prices rising. It’s a bit of a shock for those predicting a collapse in the Treasury market. And today’s auction was probably a bit of a disappointment for investors expecting a slightly higher yield.

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• The Federal Reserve’s key short-term interest rate has increased 25 basis points.
• Shorter-term Treasury yields have increased as much as 87 basis points since May.
• But interest rates on bank CDs have barely budged. It’s time for savers to benefit from higher CD rates.

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• November prices were choppy, with costs of gasoline and shelter creating most of the increase.
• Non-seasonally adjusted inflation fell 0.16%, which will cause a drop in TIPS principal balances in January.
• With rising real yields, TIPS are looking to be a strong investment in 2017.

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

And here are the new January Inflation Indexes for TIPS.