Treasury Inflation-Protected Securities

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

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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, I Bond, Inflation, Investing in TIPS, Savings Bond, TreasuryDirect | Tagged economy, finance, inflation, investing, personal-finance, The Treasury | 25 Comments

iShares unveils new ETF holding exactly one TIPS, for now

Posted on March 30, 2025 by Tipswatch

The new target-date ETF, ticker IBIL, matures in October 2035.

By David Enna, Tipswatch.com

Blackrock’s iShares division last week launched a unique ETF holding just one bond: CUSIP 91282CML2, a 10-year TIPS that matures in January 2035.

The formal name is the “iShares iBonds Oct 2035 Term TIPS ETF,” going by the ticker IBIL. The goal is simple: To track the performance of U.S. Treasury Inflation-Protected Securities maturing in 2035. Later this year IBIL will add a second TIPS, to be issued in July, and then add two more 5-year TIPS to be issued in April and October 2030.

In 2035, these TIPS will mature and iShares will begin moving proceeds to cash. After October 15, iShares will dissolve the fund and return all proceeds to investors. You can download the prospectus here.

As I have noted before, I’m not a fan of Blackrock using the term iBonds in the fund name, since this can easily cause confusion with U.S. Series I Savings Bonds, usually called I Bonds. But ignoring that fault, IBIL joins a collection of defined-maturity, single-year TIPS funds, which began maturing in October 2024 and now run through 2035 with the addition of IBIL.

These are useful ETFs, I think, especially for an investor looking to quickly build a diversified TIPS ladder out to 2035. These funds should closely track the performance of the underlying TIPS. Here is a comparison of data for each ETF, along with Vanguard’s Short-Terms TIPS fund for comparison:

The expense ratios for the iShares ETFs are only 0.10%, higher than VTIP’s 0.03% but quite good for such small funds.

Analysis

These funds are designed to be held to maturity and the asset value will rise and fall with market trends through maturity, just like any other bond fund.

Because the expense ratio is just 0.10%, I really have no problem with using these funds as an alternative to buying individual TIPS. You could quickly build a ladder through 2035 in 15 to 30 minutes, assuming the small daily volume doesn’t create issues.

However, the limited span of maturities means these ETFs aren’t the total solution for building an inflation-protected ladder of investments to cover 20 to 30 years.

Is there a required minimum investment?

No. The minimum investment would be the cost of one share (around $25.18 for IBIL on Friday afternoon) plus any possible brokerage commission. There are no limits on redemptions. iShares notes there can be a bid/ask spread on purchases and sales. That seems especially likely for an ETF that trades at such a low volume. The iShares prospectus notes:

When the Fund’s size is small, the Fund may experience low trading
volume and wide bid/ask spreads. In addition, the Fund may face the risk of being delisted if the Fund does not meet certain conditions of the listing exchange.

Traders in individual TIPS face these same bid-ask issues and at times can have trouble buying or selling TIPS in small numbers. This new ETF resolves the small-lot issue, at least. You can buy as little as one share.

Morningstar data indicate the spreads can be fairly small, such as about 0.12% for IBIK and 0.38% for IBIJ. But that compares to 0.06% for the highly-traded VTIP.

The small daily trading volumes could also be a roadblock to a large purchase. For example, if you wanted to buy $40,000 of IBII, maturing in 2032, you would buying about 1,540 shares, very close to the daily trading volume of 1,632. You might have to spread purchases over several days.

Income and inflation accrual distributions

One of the advantages of owning a TIPS to maturity is that inflation accruals continue to build over time, increasing the amount of principal and also increasing the semi-annual coupon payment as the principal increases. An individual TIPS gets the benefit of compounding, even though the coupon is distributed twice a year.

But one of the disadvantages of a TIPS is that if held in a taxable account, those inflation accruals are subject to “phantom” federal income taxes in the current year, even though they are not paid out. Plus, if your account is at TreasuryDirect, you will face the “dreaded 1099-OID,” the cryptic form reporting your taxable accruals.

The ETF plus. These defined-maturity ETFs “fix” the OID issue because inflation accruals will be paid out in the current year, along with the coupon interest. (This is the same way traditional TIPS funds work). That distribution makes these iShares TIPS ETFs more attractive for holding in a taxable account, because it eliminates the phantom income problem.

I assume this also means your broker will provide a single 1099-DIV tax form covering both coupon payments and inflation accruals.

The ETF minus. Distributing the inflation accruals in the current year means that at maturity you will be receiving only the original par value and final coupon payment, since all the inflation accruals would have been distributed.

In essence, this means if you buy IBIL at around $25 a share this week, in 2035 you are going to get back about $25 at maturity, but you will have earned inflation accruals and coupon payments along the way.

To get the full benefits of compounding and true inflation protection you would need to reinvest all inflation-accrual distributions back into these TIPS ETFs or another similar product. That could be a problem because of the very low volume. For example, Vanguard says this on reinvestments in general: “A security’s distributions will not be reinvested if the security has a low average daily trading volume.”

I have gotten feedback from readers saying they have been able to reinvest the dividends in these low-volume funds. Beyond the cost of any bid-ask spread, that is great news. If anyone has further experience with buying these funds and/or reinvesting the dividends, please provide the information in the comments section.

Final thoughts

I won’t be investing in this new ETF, IBIL, because I have already purchased CUSIP 91282CML2 as part of my TIPS ladder, filling the 2035 rung. But I can see the appeal for investors looking for a simpler way to invest in TIPS, especially in a taxable account.

The expense ratio of 0.10% is very good, especially if you can make your trades commission-free. But I do warn against using these ETFs in an assets-under-management account, which could wipe out 1% or more of your annual earnings. And in fact, I suspect these ETFs may have been designed for AUM financial advisers who really don’t understand TIPS (a lot of them don’t).

One other issue is the fact that these funds don’t offer true inflation protection over the long term, since they pay out the inflation accruals in the current year. That is great for people seeking cash flow. But an investor seeking inflation protection would need to figure out a way to reinvest distributions.

In summary, these target-maturity TIPS are good investment for cash flow. Individual TIPS are a better investment for inflation protection over the long term.

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

Posted in ETFs, I Bond, Inflation, Investing in TIPS | Tagged personal-finance, TIPS Ladder, Treasury investments | 18 Comments

Today’s not-good-news: Treasury plans ‘substantial’ layoffs

Posted on March 26, 2025 by Tipswatch

By David Enna, Tipswatch.com

Court documents filed by a U.S. Treasury official indicate the department is planning a “substantial number” of layoffs, according to reporting from Bloomberg.

The revelation came in court documents filed by Treasury to a federal judge in Maryland. The judge has placed a 14-day restraining order reinstating probationary employees who were fired in a mass action by the Department of Government Efficiency, or DOGE.

The affidavit was one of a collection meant to update the status of the probationary employees. It was submitted by Trevor Norris, the Treasury’s assistant secretary for human resources. It stated:

As of Monday, March 17, 2025, Treasury had 7,611 Affected Probationary
Employees, as defined in paragraph I0(c) of the Temporary Restraining Order. As of that date, Treasury had reinstated 7,560 Affected Probationary Employees.

… All Affected Probationary Employees have had their Removal Personnel Action Requests cancelled and have been placed in a paid Administrative Leave status. … Employees in an Administrative Leave status continue to have their access to Treasury duty locations, computer networks, and email suspended pending their return to regular duty status.

(In other words, these 7,560 employees are being paid but are not allowed to enter Treasury offices or view emails.)

… In addition, the Department is finalizing plans in response to President Trump’s February 11, 2025 Executive Order Implementing the President’s “Department of Government Efficiency” Workforce Optimization Initiative. These plans will be tailored for each bureau, and in many cases will require separations of substantial numbers of employees through reductions in force (RIFs).

The Treasury has more than 100,000 employees across several bureaus, including the IRS, Bureau of the Fiscal Service (which controls TreasuryDirect), US Mint and Office of the Comptroller of the Currency.

Clearly, the Treasury intends to remove most or all of the 7,560 probationary employees, who are not currently allowed to work or even view email. The document said:

In some case, bureaus may determine that the likelihood of ce11ain reinstated probationary employees being separated is sufficiently high that restoring them to full duties in advance of the planned RIF would be unduly disruptive to both the employees and the bureau.

Plus, additional “reductions in force” seem likely. A Treasury spokesman told Bloomberg that no final decisions have been made.

Thoughts

In following the news of firings of probationary U.S. government employees, I keep asking myself one question: What is the most likely job for a very new Treasury employee? My thought: “Answering the phone and giving customers support.”

I have been hearing anecdotally that it has been nearly impossible to get information or help from TreasuryDirect by phone or even email in recent weeks, and this turmoil is most likely the cause. You have 7,560 Treasury employees being paid but not allowed work.

In its response to Bloomberg a Treasury spokesman said the staffing cuts are meant to “increase efficiency” by consolidating support functions to improve quality of service. TreasuryDirect had been improving its customer service in recent years, but now its customers face another setback.

A bigger issue would be the potential elimination of the savings bond program, which does involve a lot of customer service because it focuses on small-scale investors. I don’t think that will happen, but let’s stay alert.

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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 EE Bonds, I Bond, Investing in TIPS, Savings Bond, TreasuryDirect | Tagged doge, news, politics, The Treasury, Treasury investments | 55 Comments

Horror stories of inflation in Argentina

Posted on March 23, 2025 by Tipswatch

The solution could require ‘the madman’ with a chainsaw. People adapt.

By David Enna, Tipswatch.com

During my recent visit to Argentina I asked a tour guide in Buenos Aires about inflation, because that’s a topic that always interests me.

Guide: “Inflation in Argentina is improving. It was down to 2.2% in January.”

Me, being ignorant: “2.2% annual inflation? That’s great.”

Guide: “2.2% a month.”

Ouch. I should have been more aware of the traumatic issue of inflation in Argentina. It is so dangerous and ingrained that the Buenos Aires Herald ran this headline on Feb. 13: “Argentina annual inflation plunged to 84.5% in January 2025.” Plunged to 84.5%.

Since I returned, the nation reported February inflation at 2.4% for the month, up a bit from January. But annual inflation dropped to 66.9%, the lowest since July 2022. Here is the annual trend over the last 8 years:

As recently as July 2024, annual inflation was running at 266% in Argentina. It has been coming down recently in the wake of the November 2023 presidential election of Javier Milei, a libertarian who has made sweeping cuts in government spending. His approach is known as “shock therapy” and includes reductions in public sector jobs, subsidies, food aid, along with freezing wages and pensions.

Elon Musk and Javier Milei in February 2025. (AP photo)

Milei, a self-described “anarcho-capitalist,” is famous for wielding a chainsaw in public (and for giving one to Elon Musk recently at a Conservative Political Action Conference in the U.S.). He told that group: “The only rational path is to shrink the size of the state as much as possible.”

Although inflation is declining rapidly in Argentina, Milei seems to be somewhat unpopular in a country that swings from left to right with every major election. Wage and pension controls — at a time of continuing high inflation — have recently triggering violent demonstrations.

Milei, 54, is known in Argentina by both critics and supporters as “El Loco,” the madman. Milei claims he hasn’t combed his hair since he was 13, adding: “From that moment on, the invisible hand combs my hair.” From a 2023 The Sun report:

A biography, El Loco, by journalist Juan Luis Gonzalez, told of Milei’s affection for his dogs, claiming he uses a spiritualist to seek guidance from his beloved English mastiff Conan, who died in 2017 and has been cloned four times.

Also, Milei created a huge controversy last month by endorsing a meme coin called $Libra on the day it was launched. Within 40 minutes, its market value soared to about $4.5 billion. Hours later, its value plunged by about 89% and the president “unendorsed” it. A criminal investigation is under way.

Wretched economic history

I certainly can’t explain how Argentina got into this economic mess, but Milei didn’t cause it. These problems have existed for decades. Rampant government spending and massive government borrowing are two important factors. The government has defaulted on its debt nine times. Argentina’s currency was devalued by 30% in 2015, and then again in 2016. Soon after taking office in December 2023, Milei devalued the peso by more than 50%. From an Associated Press report:

The South American country’s economy is such a basket case — and has been for so long — that many analysts believe that only such radical measures offer a realistic opportunity to rescue the economy. What makes his challenge so difficult is that Milei’s plan seems certain to make people’s lives worse long before they get better.

What does this mean for a typical Argentinian?

Our guide in Buenos Aires, Karla, talked about how people cope with out-of-control inflation. Some of her insights:

No sense in saving money. Got money? Spend it, because its value is going to decline dramatically over time. For this reason, you still see crowded shops and restaurants. In many cases, people pay with wads of cash.

CD rates. Karla said most people in Argentina would not consider putting money in a bank for longer than one month. Too risky. A one-month CD today is paying an annual rate of about 27%, but that remains well below the inflation rate of 67%.

Getting a loan. Who is going to lend you money when inflation is rising 67% a year? Getting a car loan or home mortgage is very difficult, and the interest rates would be severe over time. From the site TheLatinInvestor.com:

In Argentina, most transactions are conducted using cash, primarily in the form of US $100 bills. It sounds primitive but this is how it is.

Banking. People in Argentina don’t trust banks, and the country has a history of widespread bank failures as recently as 2001. U.S. banks don’t have operations in Argentina because of the unpredictable nature of the economy. This makes it a difficult environment for foreign investment.

U.S. dollars are popular. For people who can afford it, exchanging pesos for dollars is highly desirable. The current exchange rate is about 1,069 pesos to $1. In March 2023, that number was 200. For major purchases like cars or homes, $100 bills are often the desired payment method. From a New York Times article:

Nearly every big purchase in Argentina — land, houses, cars, expensive art — is done in tall stacks of U.S. currency. To save up, Argentines stuff bundles of American bills into old clothes, beneath floor boards and in bombproof safe deposit boxes past nine locked gates and five stories beneath the ground.

A sense of normalcy?

Argentina’s poverty rate has recently soared to 57% amid Milei’s austerity measures and currency devaluation. But life goes on. Prosperous areas of Buenos Aires look much like anywhere in Europe, with elegant shopping, cafes, nightlife. Many people have adapted to extremely high inflation and just hope for a solution.

Argentinians have lived with high inflation for decades. They have learned to survive, even in this harsh reality. From a recent discussion on Reddit:

We have some ways to mitigate inflation, but at the end it destroy us anyways. The things we do are: Spend the pesos as fast as we can in anything that will maintain or gain value against inflation, lower our lifestyles as the inflation surges, and the principal method for saving or planing long term is buying dollars or euros, most Argentinians have savings in dollars. …

All income is disposable income when saving makes no sense. What it destroys is any kind of long-term planning.

Most people will never be able to afford a house of their own for example, or a brand new car.

My motto for buying things is “If you have the money and want/need that, buy it now, tomorrow it will be more expensive.”

In the United States, we recently went through a very brief period of 9% annual inflation, which dropped to half that within a year. Yet, this was somewhat traumatic for a nation used to stable prices. Even today, as inflation drifts lower, many people are feeling the pain. But are we at the stage requiring a “chainsaw”? No, I’d say more like pruning shears.

Remember: Things are very good here. We have a good thing. And yes, inflation is an enemy we must resist.

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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 Inflation | 29 Comments

10-year TIPS reopening auction gets real yield of 1.935% after Fed-triggered dip

Posted on March 20, 2025 by Tipswatch

By David Enna, Tipswatch.com

Over the years, I have been known to rail against Federal Reserve commentary coming on the eve of auctions of Treasury Inflation-Protected Securities. So often, it seemed, a fairly attractive auction ended up with a mediocre real yield, thanks to the Fed.

This more or less happened yesterday, with Federal Reserve Chairman Jay Powell issuing a remarkably mixed message: 1) we can (possibly) expect two more rate cuts this year, 2) we can (probably) expect higher inflation this year and next, and 3) we can (probably) expect slower economic growth and higher unemployment this year and next.

Given all that, the Fed decided to hold short-term interest rates at current levels but also to slow down the pace of its balance-sheet reductions, which could help lower longer-term interest rates.

To me, that message seemed to forecast “stagflation,” a combination of higher inflation and slower economic growth. But the stock and bond markets were pleased. For one day, stock prices surged higher and bond yields fell.

And the result could be seen in today’s Treasury offering of $18 billion in a reopened CUSIP 91282CML2, creating a 9-year, 10-month TIPS. Most of the week, this TIPS looked likely to get a real yield somewhere in the range of 1.98% to 1.99%, but today’s result was a bit lower: a real yield of 1.935%.

That’s not really so bad. This TIPS was trading on the secondary market earlier Thursday with a real yield of 1.87%, gradually rising to 1.91%. The “when-issued” prediction, revealed just before the auction’s close, was 1.93%. The bid-to-cover ratio was 2.35, indicating lukewarm demand.

In this case, my preview article’s advice to buy this TIPS on the secondary market earlier in the week was correct. Real yields of around 2.0% were available before Powell spoke. (But trust me, it doesn’t always work out that way.)

The truth: This auction result is not bad at all. A real yield of 1.935% is attractive by historical standards, even if it is a bit below recent trends. Here is the trend in the 10-year real yield over the last two years:

The longer-term trend shows more clearly the historic value of today’s higher real yields:

Pricing

CUSIP 91282CML2 carries a coupon rate of 2.125%, set by the originating auction on Jan. 23. Because today’s auctioned real yield came in below the coupon rate, investors had to pay a premium price of 101.685184. In addition, this TIPS will have an inflation index of 1.00639 on the settlement date of March 31.

With that information, we can calculate the investment cost of $10,000 par value at this auction.

Par value: $10,000.
Actual principal purchased: $10,000 x 1.00639 = $10,063.90.
Cost of investment: $10,063.90 x 1.01685184 = $10,233.50
+ accrued interest of $44.30

To sum up, an investor purchasing $10,000 par value at auction paid $10,233.50 for $10,063.90 in principal. From then on, the investor will earn inflation accruals plus 2.125% interest on inflation-adjusted principal over the next 9 years, 10 months.

Inflation breakeven rate

With a 10-year nominal Treasury note yielding 4.23% at the auction’s close, this TIPS gets an inflation breakeven rate of 2.30%, a bit lower than recent trends. This means it will out-perform the nominal Treasury if inflation averages more than 2.30% over the next 10 years.

Here is the trend in the 10-year inflation breakeven rate over the last two years, showing the sharp decline in inflation sentiment in recent weeks:

Thoughts

Let’s be realistic: A real yield of 1.935% is fine, even if it falls a bit short of the coveted 2.0% mark. It’s a good return on a very safe investment, especially if held to maturity.

While I watched Powell’s news conference yesterday, I was fascinated by his repeated use of the term “uncertainty” when describing current economic conditions. He said:

“I don’t know anyone who has a lot of confidence in their forecast. Forecasting is always really, really hard. And in the current situation, uncertainty is remarkably high.”

From today’s Wall Street Journal report:

Officials projected weaker growth, higher unemployment and higher inflation than they had anticipated in December. Moreover, nearly all officials judged that if their forecasts were to be proven wrong, it would be in the direction of even softer growth, more joblessness and firmer price growth.

A combination of stagnant growth and higher prices, sometimes called stagflation, could make it harder for the Fed to cut interest rates this year to pre-empt any slowdown.

So should we expect big moves in Treasury yields in coming months? Definitely not in short-term rates, where the Fed will hold policy stable. Longer-term rates are “going with the flow,” and I have no idea where that flow is heading.

So getting an above-inflation yield of 1.935% for nearly 10 years on a very safe investment looks like a sensible path, at least for a portion of your overall portfolio.

Here is the history of 9- to 10-year TIPS auctions over the last four years: