Treasury Inflation-Protected Securities

No tax on Social Security benefits? Not quite true.

Posted on July 5, 2025 by Tipswatch

AI-generated image for “middle-aged couple with cash.” Source: Perchance.org

By David Enna, Tipswatch.com

I sometimes watch too much CNN (stop me!) and on Thursday I heard Republican members of Congress repeatedly state that the just-approved Big Beautiful Bill would eliminate the tax on Social Security benefits, fulfilling a campaign promise by President Trump.

And then in his celebratory speech in Iowa Thursday evening, Trump said:

“We’re making the Trump tax cuts permanent and delivering no tax on tips. No tax on overtime. And no tax on Social Security for our great seniors. Right?”

And I received this email from the Social Security Administration Friday morning:

The Social Security Administration (SSA) is celebrating the passage of the One Big, Beautiful Bill, a landmark piece of legislation that delivers long-awaited tax relief to millions of older Americans.

The bill ensures that nearly 90% of Social Security beneficiaries will no longer pay federal income taxes on their benefits, providing meaningful and immediate relief to seniors who have spent a lifetime contributing to our nation’s economy. …

The new law includes a provision that eliminates federal income taxes on Social Security benefits for most beneficiaries, providing relief to individuals and couples. … Social Security remains committed to providing timely, accurate information to the public.

A lot of this is not true, and whoever was responsible for that email should be embarrassed. What’s even weirder: There was no reason to fudge the facts here. The bill does provide meaningful (but temporary) tax relief for most seniors, and in fact will reduce federal tax bills for most seniors. But it does not eliminate the tax on Social Security benefits, which remains intact exactly as in pre-July-4 law.

What the bill does

The Big Beautiful Bill provides a $6,000 boost to senior citizens’ standard deduction from 2025 through 2028. The new tax break — $6,000 for individuals and $12,000 for couples — is for tax filers age 65 and older. It starts phasing out for those who earn over $75,000 ($150,000 for couples).

This provision is aimed at middle- to upper-middle-income taxpayers. People with very low incomes won’t benefit (they already pay near-zero taxes) and high-income people will see the deduction phased out completely. This is from a Yahoo Finance analysis:

To be clear, this provision does not eliminate taxes on Social Security benefits as Trump promised in the campaign. It is a temporary income tax deduction, not a cut in the Social Security tax. …

In addition, under existing law, people over 65 got an add-on to the standard deduction — $2,000 for a single person and $3,200 for a couple filing jointly. The White House has issued a fact sheet that clarifies those pre-existing add-on deductions will continue:

Under current law, about 40% of people who get Social Security must pay federal income taxes on some of their benefits, according to the SSA. The tax hit begins at low levels ($32,000 for couples) and eventually caps out at $44,000, when up to 85% of the couple’s benefits may be taxable. These levels were initially set in 1983 and have not been indexed to inflation.

Again, the current tax on Social Security benefits remains intact. But the boost of $6,000 / $12,000 to the standard deduction will provide a counter-balancing tax break, potentially eliminating the effect of the Social Security tax. People who rely solely on Social Security for income will likely not pay any tax at all.

However, people under the age of 65 who have already begun collecting Social Security will be subject to the full tax — potentially on 85% of benefits — with no increase in the standard deduction.

A couple over 65 with up to $96,950 in taxable income in 2025 is in the 12% marginal tax bracket. So a boost of $12,000 to their standard deduction would provide a potential tax break of $1,400, whether or not they are collecting Social Security. A similar couple with $150,000 in taxable income is the in 22% tax bracket, and would receive a potential tax break of $2,640. That is substantial.

A couple with taxable income above $150,000 would see the deduction phase out and it would be completely gone for a couple with $250,000 income. I am assuming these people would still be eligible for the current $34,700 standard deduction for couples over 65.

The $6,000 bonus deduction would be available to taxpayers whether they take the standard deduction or itemize.

Here is an analysis from Govfacts.org:

Primary Beneficiaries: The main group to benefit are middle-income seniors aged 65 and over. These are individuals whose total income is high enough to create federal tax liability but low enough to fall below the phase-out thresholds. The White House Council of Economic Advisers estimated the new deduction would benefit 33.9 million seniors.

No Benefit for the Lowest-Income Seniors: The poorest seniors, whose total income is already below existing deduction thresholds, pay no federal income tax on their Social Security benefits. For this group, an additional deduction has no effect.

No Benefit for High-Income Seniors: Wealthier retirees with incomes above the phase-out thresholds are ineligible for the deduction and see no change in their tax liability from this provision.

Harry Sit, creator of TheFinanceBuff.com, just posted a good analysis of this issue, including a chart compiling the income phaseouts:

Key takeaway: Note that some significant tax benefits remain even when a person or couple gets close to the $175,000 or $250,000 limits. Some smart income planning could result in a lower tax bill for 2025.

The new law also includes a deduction on charitable contributions, according to CNBC. The bill allows charitable taxpayers who don’t itemize to deduct up to $1,000 for single filers and $2,000 for married couples filing jointly. This begins for tax year 2026 and may also apply in some form to taxpayers who itemize.

Based on excellent information provided by commenters, it appears all the new deductions will be “below the line,” meaning they will not reduce adjusted gross income, which is used to determine Medicare surcharge levels among other things. But they will reduce taxable income.

Why this is good

The bill cleverly shifts the tax break to a 4-year increased standard deduction instead of eliminating the tax on Social Security benefits. Why is that good? Because the tax on benefits is intact and goes back into the Social Security “trust fund,” helping to pay future benefits. The trust fund is currently expected to run dry in 2032 to 2034, potentially leading to a 19%+ cut in payments to all beneficiaries.

The Committee for a Responsible Federal Budget estimates the higher senior tax deduction through 2028 would result in a loss of $66 billion in revenue over the four years. But most of that lost revenue would be outside the Social Security system.

And the downside …

Because many senior citizens will now be reporting lower adjusted gross incomes, they will in turn potentially be paying 1) less in taxes on Social Security benefits and 2) less in Medicare surcharges imposed through the Income-Related Monthly Adjustment Amount, or IRMAA. GovFacts.org says:

The nonpartisan Committee for a Responsible Federal Budget (CRFB) estimates that the “senior bonus” and other tax changes in the bill will lower revenue collected from benefit taxation by approximately $30 billion per year. …

The CRFB projects that this revenue loss is significant enough to accelerate the projected insolvency date for the Social Security OASI trust fund (which pays retirement and survivor benefits) from early 2033 to late 2032.

The IRMAA trigger levels are not directly affected by increasing the standard deduction, because IRMAA is based on adjusted gross income, before the deduction is subtracted. But with the expanded deduction, some retired people may be making smaller taxable withdrawals or stock sales to supply current income, making it easier to stay below IRMAA trigger levels.

Thoughts

No one is a “fan” of the tax on Social Security benefits, or the Medicare IRMAA surcharges for that matter. But I understand the need for these taxes and surcharges to keep these important programs going. Not every problem can be solved with a tax cut.

So, I support the tax on Social Security benefits. The problem with the tax is that the trigger levels are much too low and have never been indexed to inflation, after 42 years. Too many people at fairly low income levels are paying the tax.

The tax is crucial to help delay insolvency of the Social Security trust fund. That day is coming and a solution needs to be found. I don’t expect anything to be done in the next three years, so the problem will simply get more severe.

Trump promised “no tax on Social Security” — an idea I did not support. Congress came up with a solution to give seniors a temporary, 4-year tax cut outside of the Social Security system, adding to the federal deficit but not putting a great deal of additional strain on Social Security.

The Wall Street Journal notes:

Under the fast-track legislative procedure that Republicans are using to pass their bill, they aren’t allowed to touch the Social Security trust funds, which is where some income taxes on benefits go. Republicans devised the senior bonus deduction as a way to give tax breaks to many of the same people who pay taxes on their Social Security benefits. …

“I would welcome any relief on taxes,” said Trump voter Peter Sullivan, 67, a retired financial executive in Strongsville, Ohio. He added: “It’s still short of my Social Security tax nirvana of having it completely tax-free.”

The tax on Social Security benefits is intact and under current law will continue after the $6,000 bonus standard deduction ends in 2028. My opinion: This is a good thing. I am sure some of you disagree. Express opinions in the comment section, but please avoid political attacks or tirades.

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Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear. Please stay on topic and avoid political tirades. NOTE: Comment threads can only be three responses deep. If you see that you cannot respond, create a new comment and reference the topic.

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.

Posted in Medicare, Retirement, Social Security, Taxes | Tagged finance, personal-finance, politics, Social Security, Taxes | 77 Comments

The TIP ETF just hit a meaningless milestone

Posted on July 1, 2025 by Tipswatch

For some reason, the $110 net asset value is a marker for me.

By David Enna, Tipswatch.com

I have been writing about Treasury Inflation-Protected Securities for more than 14 years, and that is plenty of time to dream up “significant patterns” in my mind. One of those was a $110 asset value for the iShares TIPS Bond ETF.

One thing to note, right away, is that the net asset value of the TIP ETF is pretty much unchanged all the way back to 2010 — 15 years with no gain. However, net asset value excludes dividends, which include inflation accruals. So in theory, the TIP ETF’s performance should closely match inflation over those years. TIP had a total annualized return of 2.71% over the last 15 years, according to Morningstar. U.S. inflation has averaged about 2.6% over that time.

I generally don’t invest in TIPS funds or ETFs, and if I did I would use VTIP, Vanguard’s short-term TIPS ETF, which has less volatility. But TIP is the largest TIPS fund and a good indicator of the overall market, since it hold TIPS of all maturities.

For many years, I used the $110 price as a “buy” signal for TIPS in general, indicating favorable market conditions for an investment. And that worked often, as shown in the chart, with TIP bouncing higher repeatedly once it hit $110. Here is an example of my writing from November 2015:

I do follow the TIP ETF to check on the overall trend in TIPS, and I have said for a long time that TIPS values would be returning to a more ‘normal’ level when the TIP ETF dropped below $110.

This was never an “investment strategy,” but an attempt to get an idea of the relative “safety” of an investment in TIPS. In September 2022, the ETF again dipped to $110 as the Fed was intensifying its battle against inflation by raising short-term interest rates and slashing its balance sheet of Treasurys. I wrote then:

The bond market is a very scary thing in September 2022 and I’m not going to argue that anyone should be pouring money into TIPS mutual funds or ETFs. But I will argue that TIPS in general — along with these funds — are much more attractive today than they were six months ago, when the 10-year TIPS was yielding -1.04% and the TIP ETF was trading at $122.46.

The background

You need to understand that I started Tipswatch.com in April 2011, at a time when the Federal Reserve was beginning a decade of significant manipulation of the Treasury market, through a bond-buying process known as “quantitative easing.” In simple terms, the Fed began buying (and holding) medium- to longer-term Treasurys, including TIPS, to force down yields.

The first phase of QE began (mildly) in November 2008 and the second phase (also mild) started in November 2010. Things stepped up dramatically in late 2012. In this process, the Fed was “printing money” by buying up and holding Treasurys in competition with bond investors.

This continued — off and on — through March 2018, when the Fed began a brief program of “quantitative tightening,” allowing Treasurys to roll off its balance sheet. But then came the COVID crisis in March 2020. At that point, the Fed’s relaunched QE in a ballistic form, as reflected in this chart:

This chart and the next one are important in explaining the massive surge in inflation we saw in mid 2022, when the U.S. inflation rate hit a 40-year high of 9.1%. This was combined with congressional actions to push out stimulus checks to nearly all Americans. This next chart shows the incredible growth in M2, defined roughly as the U.S. supply of spendable cash:

You can blame the Federal Reserve, President Trump, President Biden, the COVID crisis, Vladimir Putin, etc., but the result after March 2020 was very high inflation. That problem is lessening today — thanks to aggressive braking action by the Federal Reserve — but inflation remains a bit high today at an annual rate of 2.4%.

What does it all mean?

Pretty much nothing. The $110 milestone was a creation of my imagination, but I do think it is a decent marker of equal levels of risk / potential gain in the TIPS market. The difference today is that the net asset value is rising to $110 instead of falling there. So is that a “sell” signal instead of a buy? I don’t think so, but there is no certainty today in the U.S. Treasury market, which will be strained by years of increasing U.S. budget deficits.

As I have noted, I don’t invest in these funds or ETFs and I don’t purchase individual TIPS for potential trading gains. Buying individual TIPS to hold to maturity is close to a “risk free” strategy, especially when real yields are at historically attractive levels.

• Now is an ideal time to build a TIPS ladder

• Confused by TIPS? Read my Q&A on TIPS

• TIPS in depth: Understand the language

• TIPS on the secondary market: Things to consider

• TIPS investor: Don’t over-think the threat of deflation

• Upcoming schedule of TIPS auctions

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Follow Tipswatch on X for updates on daily Treasury auctions and real yield trends (when I am not traveling).

Posted in Bank CDs, Cash alternatives, Federal Reserve, Inflation, Investing in TIPS | Tagged economy, finance, investing, money, personal-finance, stocks, Treasury investments | 14 Comments

The U.S. T-bill market is feeling the debt pinch

Posted on June 28, 2025 by Tipswatch

A looming debt-limit crisis is causing yield anomalies.

By David Enna, Tipswatch.com

In looking over this week’s auctions of Treasury bills, I noticed something unusual, but also predictable: The looming debt-limit crisis is beginning to send tremors through the short-term Treasury market.

For example, on Thursday I posted these results on X:

Also today, 77-day cash management bill, a unique term that Treasury says is needed for "debt limit-related constraints," pushing maturities out to September. Investment rate of 4.349%. up from 4.307% last week for the 16-day offering.
— Tipswatch (@TipsWatch) June 27, 2025

It’s unusual to see a 41-basis-point spread between the yields of a 4-week versus 8-week T-bill, on the same auction day. For example, on May 13 the 4-week auctioned at 4.293% while the 8-week was 4.322%, only a 3-basis point spread. That’s normal. A 41-basis-point spread is a strong indication that investors are pouring into the 4-week and shunning the 8-week, which will mature August 26, 2025, potentially in the middle of a Treasury funding crisis.

And then, also Thursday, Treasury issued $60 billion in an unusual 77-day cash management bill, which will mature Sept. 16, potentially beyond the crisis. The usual CMB size recently has been $50 billion and the term has been 14 days, sometimes 42 days. Treasury gave very specific reasoning for the change:

As noted in the May 2025 Quarterly Refunding Statement, until the debt limit is suspended or increased, debt limit-related constraints will lead to greater-than-normal variability in benchmark bill issuance and significant usage of cash management bills (CMBs).

Beginning with a CMB auction announcement on June 24, 2025, Treasury expects to issue a series of CMBs over the next month for up to $250 billion in aggregate. Each of these CMBs will mature on a Tuesday or Thursday in the second half of September. … Treasury expects that issuing these CMBs will at least partially offset the anticipated reduction to the net supply of Treasury bills associated with shrinking 4-, 6-, and 8-week benchmark bill offering sizes.

Technically, the debt-limit crisis has already begun. Since Jan. 21, Treasury has been using extraordinary measures to finance the government. And it has noted, “Treasury is not able at this time to provide an estimate of how long its cash and extraordinary measures may last.”

The expected “X-date,” as it is called, is likely to hit between Aug. 15 and Oct. 3, according to the Bipartisan Policy Center. As Aug. 15 approaches, you can expect to see anomalies popping up in T-bill auctions for issues that will mature during the potential shutdown.

We’ve seen this before

The anomalies will take two forms: 1) sharply lower yields on 4-week T-bills as long as the crisis remains more than 4 weeks away, and 2) sharply higher yields on longer-term T-bills that will mature in the “danger zone.” Eventually, as the X-date gets very close, investors will demand higher yields on the 4-week, too.

In 2023: The chart shows the dramatic disruption of the 4-week T-bill, with yields falling sharply at the same time the 13-week yields were rising. Once the debt limit crisis X-date reached one month away, the 4-week yield soared above the 13-week.

In 2025: At the far right of the chart, you can see the beginning of the predictable pattern: The 4-week yield is falling while the 13-week yield is rising.

I wrote about this back in April 2023, and included this chart showing the divergence in yields a month-plus before the crisis was resolved:

This chart, from the Treasury’s Yields Curve estimates page, shows that the 4-week T-bill’s yield fell 120 basis points in three weeks, while the 8-week was up 8 basis points and the 13-week up 19 basis points. The same is true across the T-bill spectrum — every issue except the 4-week saw yields rise in April 2023.

This disruption is routine because of the strange way the United States handles its debt limit, forcing a periodic crisis (and eventual resolution). This is a 2023 chart from Moody Analytics:

So far in June 2025, the T-bill disruption is just beginning, but it will step up in coming weeks if the debt limit is not increased:

In a normal market, the 4-week T-bill’s yield should be very close to the effective Federal Funds rate, which currently stands at 4.31%.

This is not a ‘crisis’

The issue could be resolved in the next week, if Senate and House Republicans can get near 100% agreement on President Trump’s “Big Beautiful Bill.”

In most versions of this funding farce, you had Republicans controlling at least one house of Congress, combined with a Democratic president. In only takes a handful of members of Congress to set off the crisis, usually as an attempt to to gain spending-cut concessions. Eventually, a compromise is reached.

In 2017 and 2018, under Trump, the debt limit was increased without much fanfare.

In 2025, you have a Republican Congress and a very powerful Republican president who will demand that the crisis be avoided. (Trump wants the debt limit to be abolished, a stand he shares with Sen. Elizabeth Warren.) Democrats won’t offer to “help out,” but the debt limit has never been an issue for them.

Trump’s Big Beautiful Bill, if passed, would resolve this problem by increasing the federal statutory debt limit by $5.1 trillion. The New York Times noted on June 19:

The national debt is approaching $37 trillion. This week, Senate Republicans unveiled legislation that would raise the debt limit by $5.1 trillion, higher than the $4 trillion increase that House Republicans voted for in their bill last month. Such an increase would likely extend the nation’s ability to borrow into 2028.

An increase of that magnitude would be a record and underscore the ideological flexibility that many Republicans are willing to embrace when they are in power.

In essence, a $5.1 trillion debt-limit increase would push any future crisis out of Trump’s presidency, an idea he supports. (It also provides evidence of large U.S. deficits triggered by this bill over the next few years.) Some Republicans, including Sen. Rand Paul of Kentucky, oppose the lengthy increase. Instead, Paul suggests suspending the debt limit by three months.

The Big Beautiful Bill seems likely to gain approval, as long as nearly every Republican follows the president’s wishes. But when? Trump wants the bill on his desk by July 4, but any snag in House-Senate negotiations could delay final passage. Beyond July 4, the X-date crisis clock will begin ticking.

It would be possible to separate the debt limit issue from the overall spending bill, but that might require concessions to Democrats. If the Big Beautiful Bill stalls (it probably won’t) then emergency action will be needed.

What happens in a debt-lock?

I don’t think the U.S. is going to default on its debt, but there’s a slight possibility we will see a short-term government shutdown and disruption to government payments. No one knows exactly how this would play out.

The Brookings Institution in 2023 issued a paper titled, “How worried should we be if the debt ceiling isn’t lifted?” The authors noted that the U.S. government created a contingency plan in 2011 at the height of a similar crisis:

“Under the plan, there would be no default on Treasury securities. Treasury would continue to pay interest on those Treasury securities as it comes due. And, as securities mature, Treasury would pay that principal by auctioning new securities for the same amount (and thus not increasing the overall stock of debt held by the public). Treasury would delay payments for all other obligations until it had at least enough cash to pay a full day’s obligations. In other words, it will delay payments to agencies, contractors, Social Security beneficiaries, and Medicare providers rather than attempting to pick and choose which payments to make that are due on a given day.”

On Thursday, we saw the Treasury launch a plan to issue $250 billion in longer-term cash management bills in coming weeks. This is a logical strategy, pushing maturities beyond the potential X-date. At the same time it reduced Thursday’s 4- and 8-week auction sizes by $5 billion each.

Most likely, this all gets resolved in the next 5 to 10 days. But as the X-date approaches, we will see worsening disruptions to the T-bill market. People will begin asking: “Is the government going to shut down?” … “Will my T-bill mature and pay out on the predicable date?” … “Is my Social Security benefit payment going to be delayed?” … “Will there be a TIPS auction this month?”

The debt crisis will be resolved, either through the Big Beautiful Bill or through emergency congressional action. As an investor, I would not hesitate to invest in a Treasury T-bill, despite the potential disruption.

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Posted in Cash alternatives, Federal Reserve, Treasury Bills, TreasuryDirect | Tagged debt limit, economy, finance, investing, personal-finance, stocks, The Treasury | 16 Comments

Let’s take the long view on real yields

Posted on June 23, 2025 by Tipswatch

By David Enna, Tipswatch.com

I noticed this morning that real yields for Treasury Inflation-Protected Securities are shifting a bit in the wake of the U.S. attack on Iran. But so far these changes seem fairly routine.

The 5-year TIPS is trading this morning with a real yield of 1.54%, down from 1.59% at Friday’s close.
The 10-year is at 1.99%, down from 2.05% on Friday.
The 20-year is at 2.52%, up from 2.41% on Friday.
The 30-year is at 2.57%, down from 2.59%.

The yield curve has been steeping throughout 2025 based on a couple of factors: 1) the shorter end (5 years or fewer) is more influenced by potential Federal Reserve cuts in short term rates later this year, and 2) the longer end reflects the high uncertainty about future U.S. budget deficits.

The 20-year TIPS is often an anomaly; the same goes for the 20-year Treasury bond, which often has a nominal yield higher than the 30-year bond. For many investors nearing or at retirement, the 20-year term is attractive because the term (hopefully) matches life expectancy.

Across the board, however, these real yields remain attractive. Could you call them historically “normal”? I’d say no, based on data from the last 22 years. The Federal Reserve of St. Louis compiles real yield data going back to 2003. A few years before that, toward the end of the dot-com bubble, real yields were extremely high, often reaching levels well above 3.00%. But the FRED (Federal Reserve Economic Data) database only goes back to 2003.

What is ‘real yield’?

Simply put, the real yield of a TIPS is the amount it will earn above official U.S. inflation over the term of the TIPS. If a 10-year TIPS has a real yield of 2.00%, and inflation averages 2.5% over the next 10 years, that TIPS will have a nominal return of 4.50% (give or take a slight variation because of compounding).

It’s not a difficult concept, right? But I once did a long interview with a Wall Street Journal freelancer writing an article on TIPS for a special section. He could not grasp the idea of real yield or how an investment could be pegged to something in the future. He decided to write this big piece without ever mentioning the term “real yield.”

I told him his editor would never allow it. His editor did allow it.

As regular readers of this site know, real yield is extremely important to investors in TIPS. In fact, it is the primary factor worth considering when buying on the secondary market.

So let’s look at real yields over the last 22 years.

5-year TIPS

Today’s 5-year real yield of 1.54% is in the high range when compared with the last 16 years, but fairly normal for the period of 2003 to 2007, just before the onset of the Great Recession. Notice the spike in real yields during that recession and also during the Covid crisis. Both of these were caused by panic selling of all assets, not from true economic reasons.

The 5-year real yield is nearly 100 basis points below its most-recent high of 2.51% in October 2023. But in my opinion it remains attractive, given its short term and solid safety.

10-year TIPS

The pattern here is similar to the 5-year. Real yields are very high today compared with the last 16 years, but fairly normal for the time before the Great Recession. The 10-year TIPS is a good benchmark, and a 2% real yield meets historical expectations for a Treasury investment. Even though real yields could continue rising, today’s yield levels are highly attractive.

20-year TIPS

For some reason FRED’s data only goes back to August 2004 for the 20 year TIPS. This term was issued at auction by the Treasury from 2004 to 2009, but those ended in January 2009, unfortunately. That’s the reason we have no TIPS maturing in the years of 2036 to 2039.

Today’s real yield of 2.40%+ is very close to the high over the 21-year period shown in the chart. This term is only available on the secondary market, often with high inflation accruals. For that reason, TIPS in the 20-year range are often shunned by investors. I am a fan of this weird term and its attractive real yields, but my TIPS ladder ends in 2043, when I will be 90 years old.

It is worth snooping around the secondary market for attractive TIPS maturing from 2040 to 2045, if you can handle purchasing the accrued principal above par value. Real yields are in the range of 2.25% to 2.53%.

See more: TIPS on the secondary market: Things to consider

30-year TIPS

For the 30-year TIPS, FRED data go back only to 2010, because the U.S. Treasury stopped issuing this 30-year term from October 2001 to February 2010. Again, this is the reason for the gap years in TIPS maturities. As you can see in this chart, the 30-year real yield is close to the high for the last 15 years.

Again, getting a real yield well above 2.0% is historically attractive. A 30-year TIPS is a highly volatile investment, but a good one for investors who know they can hold to maturity and ride out the fluctuations. In 2055 I would be 102 years old. I won’t make it.

Thoughts

Real yields have been on the move for much of 2025, but remain historically attractive through the yield spectrum, especially for terms of 10 to 10+ years. There is a lot of uncertainty right now, both for inflation and future budget deficits. I’d expect the volatility to continue.

• Now is an ideal time to build a TIPS ladder

• Confused by TIPS? Read my Q&A on TIPS

• TIPS in depth: Understand the language

• TIPS on the secondary market: Things to consider

• TIPS investor: Don’t over-think the threat of deflation

• Upcoming schedule of TIPS auctions

* * *

Follow Tipswatch on X for updates on daily Treasury auctions and real yield trends (when I am not traveling).

Posted in Federal Reserve, Inflation, Investing in TIPS, TreasuryDirect | Tagged bonds, economy, finance, investing, personal-finance, stocks, Treasury investments | 12 Comments

5-year TIPS reopening auction gets real yield of 1.650% to good demand

Posted on June 17, 2025 by Tipswatch

By David Enna, Tipswatch.com

The Treasury’s offering of $23 billion in a reopened 5-year Treasury Inflation-Protected Security – CUSIP 91282CNB3 – generated a real yield to maturity of 1.650%, close to what the market expected.

This TIPS was trading on the secondary market Tuesday morning with a real yield in the range of 1.63% to 1.65%. The auction generated a solid bid-to-cover ratio of 2.53 and the yield dipped slightly below the “when-issued” prediction of 1.66%. So demand was solid.

This version of CUSIP 91282CNB3 creates a 4-year, 10 month TIPS. It had its originating auction on April 17, when the real yield to maturity was a bit higher at 1.702%. The coupon rate was set at 1.625%.

Definition: The “real yield to maturity” of a TIPS is its yield above official future U.S. inflation, over the term of the TIPS. So a real yield of 1.65% means an investment in this TIPS would provide a return that exceeds U.S. inflation by 1.65% for 4 years, 10 months.

The 5-year real yield has been climbing recently as the bond market adapts to future Treasury borrowing needs. But the 5-year real yield has fallen a remarkable 90 basis points since its recent high in October 2023. Here is the trend in the 5-year real yield over the last two years:

Demand for this auction had raised some concern in recent days. From a MarketWatch report posted before the close:

Barclays rates analysts pointed to today’s $23 billion auction of 5-year Treasury Inflation-Protected Securities, or TIPS, as a potential source of concern for markets, given that the last three auctions of this type “tailed,” a sign of weaker demand.

A tail means investors demanded more yield at an auction than similar outstanding securities were being priced at in the open market.

The Barclays rates team, led by Jonathan Hill, said there also have been preliminary signs of a drop in TIPS allocations to foreign accounts.

Instead, the auction appeared to be met with good demand, with the real yield dipping slightly below the “when-issued” prediction.

Pricing

Because the real yield of 1.650% was slightly above the coupon rate of 1.625%, this TIPS auctioned at a small discount, with an unadjusted price of 99.883628. In addition, it will carry an inflation index of 1.00764 on the settlement date of April 30. With that information, we can calculate the exact cost of a $10,000 par value purchase at today’s auction:

Par value: $10,000.
Actual principal purchased: $10,000 x 1.00764 = $10,076.40
Cost of investment: $10,076.40 x 0.99883628 = $10,064.67
+ accrued interest of $34

In summary, an investor placing an order for $10,000 par value paid $10,064.67 for $10,076.40 of principal on the closing date of April 30. From then on, the investor will receive inflation adjustments to principal plus an annual coupon rate of 1.625% (paid on inflation-adjusted principal) until maturity. The accrued interest will be returned at the first coupon payment on Oct. 15.

Inflation breakeven rate

With the 5-year Treasury note trading at a nominal yield of 4.00% at the auction’s close, this TIPS gets an inflation breakeven rate of 2.35%, up slightly from recent auctions of this term. This means the TIPS will outperform a nominal Treasury if inflation averages more than 2.35% over the next 4 years, 10 months.

While 2.35% is a historically high breakeven rate, it seems reasonable in this new era of potentially higher inflation. Inflation over the last 5 years, ending in May, has averaged 4.6%. Here is the trend in the 5-year inflation breakeven rate over the last two years:

Thoughts

This auction seemed to go off without a hitch to strong investor demand, creating a slightly lower real yield than predicted. The real yield of 1.65% was well below recent auction highs of 2.242% (April 18, 2024) and 2.440% (Oct. 19, 2023), but remains attractive for the 5-year term.

It does not appear that the explosive Israel-Iran conflict has had a great effect on Treasury markets, as of yet. In other words, there’s been no flight to safety in U.S. Treasury investments. Meanwhile, the price of gold is up 4.7% over the last month. The value of the U.S. dollar is down 1.5% over the same period.

A declining dollar and potentially much higher oil prices (up 17% in one month) could trigger rising inflation in the United States, so an investment in inflation-protected investments looks like a wise choice. Investors in today’s auction aren’t going to get rich, but they could get some peace of mind.

Here are the results of 4- to 5-year TIPS auctions over the last five years, including the pathetically miserable auction of Oct. 21, 2021, with a real yield to maturity of -1.685%: