Treasury Inflation-Protected Securities

I Bond’s variable rate will rise to 2.86% on May 1

Posted on April 10, 2025 by Tipswatch

March prices slipped into deflation, a bit of a surprise.

By David Enna, Tipswatch.com

April 30 update: I Bond gets a new fixed rate of 1.10%, composite rate of 3.98%

The just-released March inflation report gives us something we desperately need: Some clarity.

Now we know that the inflation-adjusted variable rate for the U.S. Series I Savings Bond will increase to 2.86% on May 1, up from the current 1.90%. This was finalized by the inflation report, which had non-seasonally-adjusted inflation rising 0.22% in March.

Non-seasonally-adjusted inflation increased 1.43% during the six months from October 2024 to March 2025, which translates to the new six-month annualized variable rate of 2.86%. This rate will apply to all I Bonds purchased from May to October, but will eventually roll into effect for all I Bonds no matter when they were purchased. The data:

The current variable rate, in effect for purchases through the end of April, is 1.90%. When combined with the current fixed rate of 1.2%, the I Bond’s composite rate is now 3.11% annualized. The new variable rate will increase to 2.86%, but it seems likely that the I Bond’s fixed rate will fall to 1.1% on May 1, creating a new composite rate of 3.98%.

If you buy in April, you lock in the 1.2% permanent fixed rate for up to 30 years. You will get six months of 3.11% and then six months of 4.08%. I think it makes sense to purchase in April, if you view this as a longer-term holding.

I will have more on this later this week.

The inflation report

Let the conspiracy theories begin! No, I am just kidding. However, the March inflation report, just released by the Bureau of Labor Statistics, was unusually mild.

Seasonally-adjusted all-items inflation declined 0.1% for the month and the annual rate fell from 2.8% in February to 2.4% in March. Core inflation, which removes food and energy, rose 0.1% in March and 2.8% year over year, down from 3.1% in February. All of those numbers were below consensus estimates.

Annual inflation at 2.4% is the lowest rate since last September. And it’s unusual to see a deflationary month in March. The last time that happened was March 2020, when COVID fears were sweeping the nation. So what exactly happened?

One important factor, the BLS noted, was a 6.3% decline in the price of gasoline, which is now down 9.8% year over year. On the other hand, the cost of food at home increased 0.5% for the month and 2.4% year over year.

Shelter costs increased just 0.2% for the month and are up 4.0% for the year. That was the smallest 12-month increase since November 2021. Other items from the report:

The cost of piped gas service increased 3.6% in March after rising 2.5% in February. Those costs are now up 9.4% year over year.
Prices for used cars and trucks fell 0.7% for the month and are up only 0.6% year over year.
Costs of new vehicles rose just 0.1% for the month and were flat year over year. (It will be interesting to see how this changes as tariffs roll into effect.)
Apparel costs rose 0.4% for the month and were up only 0.3% year over year. (This is another item that could be hit by rising tariffs.)
Motor vehicle insurance costs fell 0.8% for the month but are up 7.5% year over year.
Airline fares fell 5.3% for the month and 5.2% for the year.

Apparently, the sharp decline in gasoline prices and the moderation in shelter costs were enough to push the all-items index into deflation in March. That trend for gas and shelter could continue into much of 2025, but could be balanced off by the unknown costs of unknown future tariffs.

Here is the trend in all-items and core annual inflation over the last year:

This is exactly the type of chart President Trump and the Federal Reserve would like to see, with both core and all-items inflation falling for two consecutive months. However, the current chaos over tariffs and the brewing debt-limit crisis puts a lid on celebrations.

Do we know where inflation is heading for the rest of this year? Inflation? Deflation? It’s anyone’s guess.

What this means for TIPS

The BLS set the non-seasonally-adjusted CPI-U inflation index for March at 319.799, an increase of 0.22% from the February level. That means that principal balances for all TIPS will rise 0.22% in May, after rising 0.44% in April. Here are the new May inflation indexes for all TIPS.

What this means for future interest rates

Bloomberg is leading with the perfect headline this morning: “Trump Tariff Concerns Overshadow Upbeat US CPI Report.” This March inflation report was good news, but the positive vibes are overshadowed by tariff-related turmoil in the stock and bond markets. And, of course, tariffs seem likely to trigger higher inflation in coming months.

Bloomberg does a survey of 67 inflation forecasters and not one predicted a negative number for all-items inflation in March, and not one predicted a core increase of only 0.1%. From their economists Anna Wong and Stuart Paul:

March’s surprisingly soft CPI report showed little to no pass-through from President Trump’s initial tariff increases on Chinese imports. Apparel, furnishing, and recreation items – goods that have high import content from China – all saw either price declines or only soft price gains in March.

The real signal is that consumers are pulling back on discretionary spending. Services categories like airfares, car rentals, hotels, all saw deflation.

In all, we think the report provides space for the Fed to cut rates.

The financial markets have begun pricing in multiple rate cuts by the Federal Reserve this year, up from possibly one from earlier readings. That assumes the U.S. economy is slowing down. This March inflation report helps support the rate-cut theory, but the Fed still needs to pause and see the actual effect of tariffs on prices.

It also indicates an increasing chance of stagflation — a slowing economy combined with rising prices. From Edward Harrison, via Bloomberg:

That speaks to the Fed holding rates steady for the foreseeable future until the full economic effects of Trump’s policy changes become clearer.

• Confused by I Bonds? Read my Q&A on I Bonds

• Let’s ‘try’ to clarify how an I Bond’s interest is calculated

• Inflation and I Bonds: Track the variable rate changes

• I Bonds: Here’s a simple way to track current value

• I Bond Manifesto: How this investment can work as an emergency fund

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

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 Cash alternatives, Federal Reserve, Inflation, Retirement, Savings Bond, TreasuryDirect | 24 Comments

The Treasury market seems to be crumbling. Why?

Posted on April 9, 2025 by Tipswatch

By David Enna, Tipswatch.com

Update, 2:15 pm April 9: Just about 12 hours after enforcing crippling tariffs on much of the world, President Trump changed course and announced a 90-day pause on reciprocal tariffs (above the new baseline 10%) on every country except China, which now will face tariffs of 125% on exports to the United States.

The stock market has reacted positively, with the S&P 500 index now up about 8% from where it was trading at 1:19 p.m. But the 10-year Treasury nominal yield remains elevated at about 4.42%. A reopening auction for a 10-year Treasury note was well received today, getting an attractive high yield of 4.435%, up from 4.310% last month.

So now we get a 90-day reprieve. It is hard to see what will change in three months if the White House continues to demand an even balance of trade with every nation.

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Just a week ago, in the early stages of our brand-new “Tariff Crisis,” the stock market was falling sharply and the U.S. Treasury market was acting as a safe haven, with yields falling as buyers poured into the Treasury market.

This crisis isn’t even a week old and yet the S&P 500 has already lost about 13% of its value since closing at 5671 on April 2. That was last Wednesday, and since then we have had only four full trading days. Over that time, short-term Treasury yields have been fairly stable, while longer-term nominal yields have been climbing.

As the chart shows, Treasury yields dropped initially, as expected, but then after the weekend began rising quickly, up 40 basis points on the benchmark 10-year note and 45 basis points on the 30-year bond. That’s a big jump, especially at a time when you’d expect yields to be at least holding stable.

Treasurys are traditionally considered to be among the safest of safe-haven assets. Investors rushing to sell Treasurys during a time of crisis is a sign of market distress.

So why and how is this happening? I’ve heard countless experts interviewed on this topic in the last two days and not one could give a definitive answer. But here are some theories:

China and other nations are dumping Treasury investments.

I think this is probably a factor and it would make sense for China to try to use its longer-term Treasury holdings to disrupt President Trump’s desire for lower interest rates. From an article on Investing.com:

Venture capitalist and Trump supporter Chamath Palihapitiya … said Tuesday afternoon that he is hearing from people that China has been dumping U.S. Treasuries in an effort to move yields up and shift the narrative.

“I’m hearing they are dumping UST to try and move rates to shift narrative and make our upcoming Treasury auctions more expensive,” Palihapitiya commented on X. “May make sense to delay auctions to next week. China can’t sell indefinitely.”

Investors are losing confidence in U.S. Treasurys

This also makes sense as our nation careens toward another debt-limit and budget crisis. From BusinessInsider.com:

Analysts at Deutsche Bank said in a note on Tuesday that the heavy sell-off “spoke to broader concerns about the safety of US assets and their capacity to act as a haven in times of market stress.” …

“A trend which will be watched closely is an apparent loss, whether temporary or otherwise, of US assets’ safe-haven status. Treasurys sold off heavily amid some speculation China and other parties are dumping their holdings as a retaliatory tool,” said Russ Mould of UK-based investment platform AJ Bell.

Hedge funds are unwinding losing bets.

From the Wall Street Journal:

Many analysts have been pointing the finger at leveraged hedge-fund trades. The strategy at the heart of concerns is known as the basis trade, and was a key driver of the 2020 “dash for cash.”

Hedge funds buy cash Treasurys and sell a Treasury futures contract to another investor, betting that the two prices will converge as the settlement date nears. The difference, or spread, is often very small, but hedge funds use leverage to increase the profits.

When the market makes large moves—as seen in the past few days—traders who had been betting on what they viewed as the sure thing of convergence can find their positions taking on water. They are often forced to sell.

This theory was embraced by Treasury Secretary Scott Bessent this morning in an interview with Maria Bartiromo of Fox Business:

Some highlights from that interview:

Bessent: Maria, I wanted to address in the meantime there is one of these — I’ve seen it very often in my career — there is one of these deleveraging convulsions that’s going on right now in the markets and I think it’s in the fixed-income market. There’s some very large leverage players who are experiencing losses they’re having to deleverage. I believe there is nothing systemic about this.

I think that it is uncomfortable but normal deleveraging that’s going on in the bond market and I expect that as we see the leverage come down … the market will come down.

Jump to 16:24

Bartiromo: You know, the fixed-income issue has been a debacle this morning that is why I assume rates are moving up. The yield on the 10-year, we were wondering if there was a deleveraging issue and whether or not China is dumping Treasuries. Is that what you see right now? Is China dumping Treasuries to try to put pressure on this market?

Bessent: You know, Maria, I think it works against their purposes if they’re dumping Treasuries because they have to buy something else. If they sell dollars and they strengthen their currency and as I said earlier they’ve actually been weakening their currency, which is a loser for everyone.

And again, when I hear all these stories, the dollar’s no longer the reserve currency, you know, if you end up with the Chinese who are willing to use their currency as a trade tool, that doesn’t seem like a very good reserve to me.

Thoughts

I have been saying for some time that the United States is heading into a period of unprecedented economic uncertainty. Some of the cause of that uncertainty has roots stretching back a decade or more. But this Tariff Crisis has brought everything to the surface, on fire. It is hard for me to imagine a solution in the near term.

The Treasury market seems to have been weakened, but most of the probable causes seem like they could be short-term effects as the stock and bond markets struggle through this chaotic period. Most likely, it will recover.

And then, could the Federal Reserve come to the rescue? I hope that doesn’t have to happen, but I have been predicting a major bailout of some sort as U.S. big-money investors grab at high-risk investments. In this case, most likely, the Fed would try to calm the market by buying longer-term Treasurys, not by cutting short-term interest rates.

If I wasn’t finished building a TIPS ladder at this point, I would probably be diving into the secondary market to take advantage of this disruption and attractively high real yields on longer-term TIPS: 2.17% on the 10-year, 2.46% on the 20-year, 2.61% on the 30-year. But yeah, that would take an investor with guts.

Do I have the answers or solutions? No. Let’s hear your ideas.

See you tomorrow with news of the March inflation report and finalized I Bond variable rate.

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

Posted in Cash alternatives, Federal Reserve, Inflation, Investing in TIPS | Tagged economy, finance, investing, personal-finance, stocks, Treasury bonds, Treasury notes | 43 Comments

A 5-year TIPS is maturing April 15. How did it do as an investment?

Posted on April 7, 2025 by Tipswatch

It had a real yield negative to inflation. And it was a winner.

By David Enna, Tipswatch.com

One of the basic rules of investing in Treasury Inflation-Protected Securities is: Get the highest possible real yield and ignore all the other noise.

But it doesn’t always work that way. Let’s time-shift back to the depressing early days of the COVID pandemic, when stock and bond markets were reeling. On April 23, 2020, the Treasury auctioned a new 5-year TIPS, CUSIP 912828ZJ2, with a real yield of -0.32%.

In other words, this new TIPS was guaranteed to under-perform inflation by 0.32% over the next five years. That was totally undesirable, right?

Wrong. At the time, a 5-year nominal Treasury was yielding just 0.37%, meaning this TIPS got an inflation breakeven rate of 0.69%. a wildly low number. Investors were betting that inflation would average just 0.69% from April 2020 to April 2025.

As often happens, investors were very wrong. In fact, inflation over the last five years has averaged 4.3%. And so investors in CUSIP 912828ZJ2 did much better than investors in a nominal Treasury at the time.

We know CUSIP 912828ZJ2’s final return because the February inflation report issued on March 12 set its inflation index at 1.23240 as of April 15, the maturity date.

The data page for this TIPS on EyeBonds.info shows it produced a nominal return of 3.904%, crushing the 5-year Treasury’s note return of 0.37% by an annual margin of 3.61%. That was a direct result of the soaring inflation we saw beginning just a year later, rising to 4.2% in April 2021 and topping off at 9.1% in June 2022.

Here are data for all 5-year TIPS that have matured since April 2012. Note that the early trend of under-performance has dramatically shifted because of the ultra-high inflation of recent years.

Click on image for larger version. View more data on my TIPS vs Nominals page.

To view this chart at a glance, the annual variance number in the last column shows how the inflation breakeven rate compared to actual 5-year annual inflation. When the numbers are green, a TIPS was the superior investment. When they are red, the nominal Treasury was the better investment.

Fair warning: The next decade could be entirely different, especially since inflation breakeven rates are now running much higher, around 2.4%.

Big winner: The I Bond

Here things get interesting. In April 2020, you could have invested in an Series I Savings Bond with a fixed rate of 0.20%, which seems crazy but again demonstrates the lagging effects of the Treasury’s fixed-rate decisions. That fixed rate was set in November 2019, when 5-year real yields were higher. It remained in effect until the end of April 2020.

Clearly, an I Bond with a fixed rate of 0.20% is going to outperform a TIPS with a real yield of -0.32%. Data on EyeBonds.info show a $10,000 purchase of this April 2020 I Bond is now worth $12,412, for an annual return of about 4.4%.

Notes and qualifications

My TIPS vs. Nominals chart is an estimate of performance.

Keep in mind that interest on a nominal Treasury and the TIPS coupon rate is paid out as current-year income and not reinvested. So in the case of a nominal Treasury, the interest earned could be reinvested elsewhere, which would potentially boost the gain. For certain, we don’t know what the investor could have earned precisely on an investment after re-investments.

In the case of a TIPS, the inflation adjustment compounds over time, and that will give TIPS a slight boost in return that isn’t reflected in the “average inflation” numbers presented in the chart.

• 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 (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).

Posted in Cash alternatives, I Bond, Inflation, Investing in TIPS | Tagged investing, personal-finance, Treasury investments | 15 Comments

Howard Marks: The world economy has been shaken ‘like a snow globe’

Posted on April 5, 2025 by Tipswatch

By David Enna, Tipswatch.com

What a week. I made a point to watch President Trump’s tariff announcement on Wednesday live and yes, it was a shock. Beyond the politics, I felt the United States was pushing the world into a new, and probably dangerous economic era.

Obviously, I was not alone. Just before Trump spoke, the S&P 500 index closed Wednesday at 5669. Friday, it closed at 5075, a drop of 10.5% in two days.

Friday morning, I was taking my morning walk when I happened to hear Bloomberg’s best contrarian anchor, Lisa Abramowicz, interviewing Oaktree Capital’s Howard Marks about the state of credit and world markets in the aftermath of the tariff decisions.

This was a fascinating and insightful interview, especially since Abramowicz simply let him talk. Marks, 78, is a noted author, credit expert and financial theorist who publishes “memos” detailing his market insights. “When I see memos from Howard Marks in my mail,” Warren Buffet once said, “they’re the first thing I open and read. I always learn something.”

His company focuses on high-yield debt, an area I know little about or care to follow. But Marks has some great insights into U.S. markets. Here is the interview:

And here are some highlights from the interview:

Marks: You know, obviously the state of the world, which equity prices depend on, is completely in flux and has been radically changed. Most investors think for the worse. That’s why prices are down. The question, of course, is whether they’re down too much, just right or not enough. And almost nobody can say.

Abramowicz: How do you start to even measure something like a potential paradigm shift, like the tariffs that were announced earlier this week?

Marks: Well, first of all, of course, measure is the wrong word because that suggests some quantification, which is impossible. There’s nothing to measure. …

This is the biggest change in the environment that I’ve seen probably in my career. You know, we we’ve gone from free trade and world trade and globalization to this system, which implies significant restrictions on trade in every direction and a step toward isolation for the United States.

I believe that the last 80 years since World War II have been the best economic period in the history of mankind. And one of the major reasons was the growth of trade. …

There was a 25-year period which I cited in one of my memos ten years ago in which the cost of durables in the U.S. went down by 40% in inflation-adjusted terms. That kept a lid on inflation here. It made goods available cheaply to all Americans. If we don’t have world trade, we don’t have that benefit. …

The tariffs are designed to encourage production at home. But who could imagine that that most things produced in the United States will be as cheap as they are coming from abroad. In other words, things will cost more. … There were financial benefits from globalization, including keeping a lid on inflation.

And so, you know, tariffs are an increased cost. Somebody has to pay them. And, you know, most people think the consumer will pay them.

Abramowicz: You’ve thrived during your almost five-decade career during times of dislocation. Is this a time of dislocation to play or not to?

Marks: Well, it’s a time of dislocation. Everybody has to judge for themselves whether the reduction in asset prices so far is right, inadequate or excessive. If it’s excessive, you should jump in with both feet. If it’s inadequate, you should wait until things adjust further. And it’s impossible to make that judgment qualitatively. …

Normally, we think we know what’s going to happen in the future. We normally assume the future will look mostly like the past. We extrapolate. And usually it works because the world doesn’t change that much. But the world economy and the world order beyond the economy, meaning geopolitics and international relationships, has been shook up like a snow globe by the events of the last days. And nobody knows what it’s going to look like. Nobody knows.

And today, whatever your forecast may be, you have to say the probability that I’m right is lower than ever. Because the probability that we know what the future is going to look like is lower than ever.

Abramowicz: Do you still think that the US is the best place to invest?

Marks: It’s I think it’s probably still the best place, but it’s less best than it used to be.

Thoughts

I try very hard to keep Tipswatch.com focused on policy and economics, not politics. And I define myself politically as “an observer,” but of course I have opinions. This was a dangerous week for the U.S. economy and the nation’s role in the world, especially if you care about the U.S. dollar’s status as the world’s reserve currency.

I think the case can be made for some logical retaliatory tariffs in cases where the United States — the richest nation on Earth — is being abused. But because we are so rich, and so consumer-oriented, we will always run trade deficits with many nations where products can be produced at lower cost.

I am sure some readers will agree, some disagree. Please keep comments focused on the issues, not name-calling or taunting. Thank you for reading.

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

Posted in Federal Reserve, Inflation, Investing in TIPS, Tariffs, Treasury Bills | 65 Comments

My I Bond fixed-rate projection just fell to 1.10%

Posted on April 3, 2025 by Tipswatch

The benchmark 5-year real yield continues to fall.

By David Enna, Tipswatch.com

April 11, 2025, update: Welcome to the I Bond ‘buying season’

April 10, 2025, update: I Bond’s variable rate will rise to 2.86% on May 1

Amid all this week’s financial chaos, I am trying to focus on something I more or less understand: Projecting the May 1 fixed-rate reset for the U.S. Series I Savings Bond.

When I last looked at this topic on March 9 the real yield of a 5-year TIPS was trading at 1.57%, which was down 40 basis points from the start of this year. In the past month, the 5-year real yield has continued declining. It closed Wednesday at 1.44% according the Treasury’s daily estimate , but in the midst of tariff paranoia this morning is trading at 1.12%.

I’d expect a bounce higher, but who knows? But even ignoring this morning’s decline, it looks likely that the I Bond’s fixed rate is going to fall from the current 1.2% to 1.1% at the May 1 reset.

The 5-year real yield is key

The Treasury has never revealed a formula for setting the I Bond’s fixed rate, but it has stated it looks at real yield trends over time. I Bond watchers have observed that over the last decade one formula has accurately predicted the Treasury’s fixed rate decision: Apply a ratio of 0.65 to the average 5-year real yield over the preceding six months. This formula has worked without fail at least since 2017.

This morning I calculated the 5-year real yield data from the date of the last reset on November 1, 2024, to Wednesday’s close. And this week, for the first time, the data show the trend has tilted toward the 1.10% fixed rate.

Note that the I Bond’s fixed rate is always set to the one-tenth decimal point and that means the result of the 0.65 ratio calculation has to be rounded. Now that it has dropped below the 1.15% level, it rounds to 1.10%. And that level is likely to stick with the 5-year real yield plummeting this morning.

Back on March 9 I projected that the average 5-year real yield would need to remain above 1.57% through March and April for the 1.20% fixed rate to carry over to May 1. That is not happening.

Is there a strategy?

As I noted last month, the Trump administration could decide to ditch the long-standing formula for setting the I Bond’s fixed rate. Or it could be swayed by the current low yield of a 5-year TIPS and opt to go lower. Or it could decide to eliminate the savings bond program entirely. (Not likely). So we don’t know.

But from what we do know, it looks like the wisest choice for committed I Bond investors to buy their 2025 allocation late in the month of April, to capture the current 1.20% fixed rate. I ended up completing my 2025 purchases on March 28 because I had available cash and I could see the fixed rate wouldn’t be going any higher.

Are I Bonds still attractive? Absolutely. An I Bond purchased today will earn 1.2% over inflation, while a 5-year TIPS will earn 1.12%. We are back to the strange days when the I Bond has a yield advantage over a TIPS. When that happens, I Bonds are clearly the superior investment because they earn tax-deferred interest, have rock-solid deflation protection and a flexible maturity term.

Next week, on April 10, we will get the March inflation report, the final piece of data needed to set the I Bond’s new variable rate. The official seasonally-adjusted inflation number could be close to zero, but non-seasonally adjusted inflation should be higher, maybe 0.2%. That would give us a new six-month variable rate of 2.80%, up from the current 1.90%.

But that is next week’s news and I will be doing an update on the fixed-rate projection after the March inflation report is revealed.

• Confused by I Bonds? Read my Q&A on I Bonds

• Let’s ‘try’ to clarify how an I Bond’s interest is calculated

• Inflation and I Bonds: Track the variable rate changes

• I Bonds: Here’s a simple way to track current value

• I Bond Manifesto: How this investment can work as an emergency fund

* * *

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