Treasury Inflation-Protected Securities

U.S. annual inflation ticks up to 2.6%, but matches expectations

Posted on November 13, 2024 by Tipswatch

By David Enna, Tipswatch.com

It’s good news when a monthly U.S. inflation report matches expectations. And October delivered, even though annual all-items inflation ticked higher and core remained too strong for comfort.

The U.S. Bureau of Labor Statistics reported that all-items CPI-U increased 0.2% on a seasonally adjusted basis in October, the same increase as in each of the previous three months. Over the last 12 months, the all-items index increased 2.6%, higher than September’s 2.4%. Core inflation, which removes food and energy, held steady at 0.3% for the month and 3.3% for the year.

All these numbers matched economist expectations in a clean sweep, which hardly ever happens. Inflation is hard to predict.

The BLS noted that shelter costs increased 0.4% in October, accounting for more than half of the all-items increase. Shelter costs were 4.8% higher year over year. Those increases were partially offset by a 0.9% drop in gasoline prices, which were down 12.2% year over year. More from the report:

Food at home prices rose only 0.1% for the month, after rising 0.4% in September, and are up 1.1% year over year.
Electricity costs rose 1.2% for the month and 4.5% year over year.
Apparel costs fell 1.5% for the month and are up just 0.3% for the year.
Airline fares rose 3.2% for the month and are up 4.1% year over year.
The costs of motor vehicle insurance rose 1.2% and are up 14.0% year over year.
Medical care services were up 0.4% for the month and 3.8% year over year.
Costs of new vehicles were flat for the month and down 1.3% for the year.
Used vehicle costs rose 2.7% but are still down 3.4% year over year.

Overall, while this October inflation report met expectations, it also clearly shows U.S. inflation has not been tamed. This is not good news. Here is the trend in U.S. inflation over the last year, showing the uptick in all-items costs:

What this means for TIPS and I Bonds

Investors in Treasury Inflation-Protected Securities and U.S. Series I Savings Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust principal balances for TIPS and set future interest rates for I Bonds.

The BLS set the October inflation index at 315.664, an increase of 0.12% over the September number. We are heading into the time of year when non-seasonal inflation will be running lower than adjusted inflation. Don’t be surprised if we see one or two months of deflation in this index before the end of the year.

For TIPS. The October number means that principal balances for all TIPS will increase 0.12% in December, after rising 0.16% in November. Over the 12 months ending in December those balances will have increased 2.6%. Here are the new December Inflation Indexes for all TIPS.

For I Bonds. October marks the first month of a six-month string that will determine the I Bond’s new variable rate, to be reset May 1, 2025. After one month, inflation has increased 0.12%. It’s way too early to draw any conclusions from that. (But in October 2023, non-seasonal inflation fell 0.04%, the first of three consecutive deflationary months.) Here are the data:

View historical data on my Inflation and I Bonds page.

What this means for future interest rates

Overall inflation rose in October, which was expected but can’t be welcomed. Because the numbers were in line with expectations, we can probably expect the Federal Reserve to go ahead with a 25-basis-point cut in short-term rates in December.

The effect of that cut on the economy would be minor because longer-term rates have increased dramatically in the last few weeks. U.S. 30-year mortgage rates have increased from about 6.1% at the beginning of October to 6.8% today.

From this morning’s Bloomberg report:

The figures underscore the slow and frustrating nature of the battle against inflation, which has often moved sideways — sometimes for months at a time — on its broader path down. …

“October’s CPI report remains in the same holding pattern as the past few months – inflation isn’t picking back up, but it’s also not cooling any faster,” said Anna Wong of Bloomberg Economics.

“October’s CPI report contains no information that would discourage the FOMC from cutting rates again at the December meeting,” said Michael Arnold, Bloomberg Economics Editor.

My impression is that this report changes nothing. Inflation remains well above 2.0% and will continue to be a long-term danger if the U.S. economy and stock market hold strong.

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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 Federal Reserve, I Bond, Inflation, Investing in TIPS, Savings Bond | Tagged economy, finance, inflation, investing, news | 11 Comments

Now is a great time to build (or improve) a long-term TIPS ladder

Posted on November 10, 2024 by Tipswatch

By David Enna, Tipswatch.com

Because of a remarkable confluence of events, including last week’s presidential election result, real and nominal yields for U.S. Treasurys have been rising dramatically, up 40 to 50 basis points since October 1.

But this article is not about politics. It is about opportunity.

Just a couple months ago, I was hearing from investors ruing the fact they missed the chance to build a ladder of Treasury Inflation-Protected Securities with yields near 2024 highs. But now that real yields have again surged higher, that door is open again.

Why a TIPS ladder?

Jason Zweig, personal finance columnist for the Wall Street Journal, wrote an article last week titled, “What to Buy if the Election Has You Worrying About Inflation.” I talked with Zweig last week before he posted the article. A lot of our discussion focused on the sometimes unexpected risks of investing in ETFs holding a broad range of TIPS. From the article:

In 2021, TIPS funds returned an average of 5.5%, while a U.S. bond index fund fell 1.7%. Naturally, investors and financial advisers bought TIPS in titanic quantities that year, pouring $42.4 billion into mutual funds and exchange-traded funds that specialize in them, according to Morningstar.

Right on cue, in 2022 the Fed jacked up interest rates and TIPS lost about 12%. Fickle investors fled TIPS funds, yanking out a combined $37.2 billion in 2022 and 2023.

Dumping all this money into and out of TIPS makes no sense.

Zweig then explained the advantages of buying individual TIPS and holding to maturity:

If you buy TIPS directly and hold them to maturity, your future rate of return after inflation is certain, as is the return of your principal. …

“We aren’t mathematical beings, we are emotional animals,” says Allan Roth, a financial planner at Wealth Logic in Colorado Springs, Colo. If you buy TIPS directly, “you know your spending power, what your cash flow is going to buy, in each future period,” he says. “You don’t know that if you buy a TIPS fund. And that makes it easier to stay the course if you own the TIPS directly.”

I am not a fan of broad-based TIPS funds and ETFs, although I have owned them in the past. By the time of the big bond decline of 2022, I had consolidated my TIPS funds holdings into Vanguard’s Short-Term TIPS ETF (VTIP) which ended 2022 with a total return of -2.96%, not devastating. As TIPS real yields started climbing out of negative, I began converting all my VTIP and part of my Total Bond Fund (BND) investments into a ladder of individual TIPS, all in a traditional retirement account.

Roth has been an important advocate for using a ladder of TIPS (at current yields) to create a reliable and totally safe withdrawal rate of 4%+ through a 30-year retirement. And thanks to his urging, the process of filling a TIPS ladder has gotten a lot easier. Just last month, Roth published an article titled, “Four Easy Steps to Build a TIPS Ladder.” He writes:

The world is and always has been risky and it’s feeling riskier than usual. What if stocks have a real and protracted plunge rather than the teddy bears we have had this century? What if all of this government debt causes hyperinflation? Building a TIPS ladder gives us a license to spend and creates a spending floor.

Roth’s article gives step-by-step instructions for creating a model TIPS ladder using the tool at Tipsladder.com. I won’t repeat the steps here, but the result could be an investment list like this — at a cost of $452,656 — for a TIPS ladder running from 2025 to 2054 and providing a safe, inflation-adjusted base income of $20,000 a year, with a safe withdrawal rate of 4.42%.

Click on image for larger version. Source: Tipsladder.com

An opportunity to build, or improve

Here is a chart showing real yields for 5-, 10-, and 30-year TIPS over the last 15 years, showing how TIPS of all maturities are near highs for this 15-year period.

The unique thing about this chart is the alignment of real yields into a much tighter band than we’ve seen historically. And that means that an investor can find attractive real yields for every year of a TIPS ladder. That’s an opportunity.

My personal TIPS ladder was built chaotically, and I have added in some nominal Treasurys and CDs timed to mature in the years 2025 to 2029 to allow me to purchase 10-year TIPS to fill the gap years of 2035 to 2039. Here are my Treasury investments laddered through 2043, with a comparison to the real yields you can find today on the secondary market:

Looking at this list, I’d say I could do better today in some cases than I did building the ladder in late summer/early fall 2023. I am happy with these investments, but will still look for opportunities to add to the ladder. Just last week, for example, I purchased the July 2034 TIPS with a real yield of 2.008%. (That same TIPS will have a reopening auction on November 21.)

Can real yields continue climbing higher? Certainly. But if you can nail down a real yield of 2.0%+ over the long term, you’ll end up fine, with a safe yearly withdrawal rate of 4.4% or more.

My ladder ends in 2043, but if you are building beyond that year, you can find very attractive yields through 2054. The real yield curve has been steepening, meaning you get a better return for a longer maturity. These very-long term TIPS are highly volatile, so you need to invest, forget and hold to maturity. Zweig writes:

Of course, in the bond-market bloodbath of 2022, the prices of individual TIPS fell. So did TIPS funds. Those losses apparently felt much more intense to people who owned TIPS funds than they did to investors who owned the underlying securities directly. That’s probably because direct holders draw comfort from the expectation that they’ll hold the TIPS until maturity. …

If you want to assure yourself of having a known amount of investment income in a specific year, buy TIPS directly. …

I’m buying TIPS. You should, too.

• 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 Cash alternatives, Federal Reserve, Inflation, Investing in TIPS, Retirement, TreasuryDirect | 76 Comments

Treasury sets I Bond’s fixed rate at 1.20%, composite rate falls to 3.11%

Posted on October 31, 2024 by Tipswatch

But … no clarification yet on delivery of gift-box purchases.

By David Enna, Tipswatch.com

The U.S. Treasury just announced a 1.20% fixed interest rate for the Series I Savings Bond, creating a new six-month composite rate of 3.11% for purchases from November 2024 through April 2025.

No surprises there. This is exactly what I was predicting in my preview article posted earlier this week.

At this point, it appears the Treasury is holding the annual purchase cap at $10,000 per person per year. But it has not yet posted the full news release on the rate change. That could be coming tomorrow.

Nov. 1 update: Here is the Treasury announcement, which confirms the fixed and composite rates.

In addition, Treasury has issued no clarification on delivery of I Bonds held as gift-box purchases. In a recent email, TreasuryDirect had asked investors to deliver those gifts “as soon as possible.” The site continues to say this:

Savings bonds you purchase as gifts aren’t included in your annual limit. The purchase amount of electronic savings bonds you transfer, deliver as gifts, or de-link to another TreasuryDirect account holder is applied to the annual purchase limit of the recipient. It is applied in the year the bonds are delivered to the recipient’s account.

In recent days, some callers to TreasuryDirect have received advice to 1) go ahead and deliver all gift-box savings bonds to recipients, and 2) face a temporary ban on future purchases because of those deliveries. The still-active statement from the Treasury’s Research Center contradicts that feedback.

So … we are still awaiting clarification. It could be that changes are coming January 1, so we may need to wait for detailed information.

The I Bond rate reset

The interest rate on a Series I Savings Bond changes every six months, based on inflation. The rate can go up, or as in this case, down. The overall rate is calculated from a fixed rate and an inflation-adjusted variable rate. The fixed rate never changes. The variable rate is reset every six months and so is the composite rate.

The fixed rate was set at 1.20%, which is in line with the formula the Treasury appears to have been using for a decade: Applying a ratio of 0.65 to the six-month average of the real yields of the 5-year Treasury Inflation-Protected Security. The rate of 1.20% was consistent with my forecast:

The fixed rate is always set to the 1/10th decimal point, so variations in the ratio reflect rounding. But the 5-year TIPS yield has been a good forecast tool.

The variable rate was based on six months of inflation data from April to September 2024. The increase was 0.95%, which is doubled to determine the six-month, annualized variable rate of 1.90%.

You can view the history of I Bond variable rates and fixed rates on my Q&A on I Bonds page. Also, you can see historical inflation data on my Inflation and I Bonds page.

The composite rate doesn’t simply combine the two rates, but uses a formula to reflect potential compounding during the six-month term. The end result was 3.11% instead of the 3.10% you’d get from simple addition.

The new six-month, annualized composite rate for purchases through April 2025 will be 3.11%, down from 4.28% for purchases through October. For holders of recent I Bonds with a fixed rate of 1.3%, the composite rate will be 3.21%. If you are holding an I Bond with a fixed rate of 0.0%, the new six-month composite rate will be 1.90%.

While those rates are lower than you can find on a 4-week Treasury bill (currently 4.87%), an I Bond with a fixed rate of 1.2% or 1.3% remains attractive, in my opinion. It will out-perform official U.S. inflation by more than 1.0%, with total safety, tax-deferred interest, and a flexible maturity date.

If your investment timeline is relatively short-term, go with T-bills. I Bonds are better used as a medium- to longer-term cash-equivalent investment.

EE Bonds

Also today, The Treasury set the fixed rate for the Series EE Savings Bond at 2.60%, down 10 basis points from the current 2.70%. The doubling period remains at 20 years, meaning the EE will earn 3.53% annually if held for 20 years. That rate is well below the 4.60% yield of a 20-year Treasury, meaning EE Bonds will be largely ignored unless short-term savings rates fall below 2.60% before April.

• 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).

Posted in Cash alternatives, I Bond, Inflation, Retirement, Savings Bond, TreasuryDirect | 23 Comments

It’s going to be a big week for I Bonds

Posted on October 28, 2024 by Tipswatch

Oct. 31 update: Treasury sets I Bond’s fixed rate at 1.20%, composite rate falls to 3.11%

By David Enna, Tipswatch.com

By Thursday (or possibly Friday) we are going to get a lot of new information about U.S. Series I Savings Bonds: a new variable rate, new fixed rate, new composite rate and potentially new rules for gift-box purchases and — if we are fortunate — an increase in the annual purchase limit.

Technically, these changes will take effect Friday, November 1, but the Treasury has lately announced the new rates the day before, since purchases on that last day — October 31 — will be getting the new November rates. But with TreasuryDirect everything is mysterious, so we get this notice on its main page:

That notice seems to imply you could make an I Bond purchase on Thursday and still get the current 4.28% composite rate. However, when you place an order on TreasuryDirect, it completes on the next business day. So if you purchase I Bonds on October 31, you will “complete your purchase” on November 1, and you will get the new November rate. Do not wait until Thursday if you are making an I Bond purchase and want the current 4.28% composite rate.

Update, Monday 10:05 p.m.: TreasuryDirect updated its homepage notice to reflect that the actual deadline for making an October-registered I Bond purchase is Wednesday, Oct. 30:

New variable rate

Certainty factor: 100%

This one is already set: The I Bond’s new inflation-adjusted variable rate will be 1.90%, down from the current 2.96%, for purchases beginning November 1. It will roll into effect for all I Bonds eventually, depending on the month of purchase.

The variable rate was set by the increase in non-seasonally adjusted inflation for the months of April to September 2024. The increase was 0.95%, which is doubled to determine the six-month, annualized variable rate of 1.90%.

New fixed rate

Certainty factor: 80%

The Treasury does not reveal how it sets the I Bond’s fixed rate, but in recent years I have found a reliable predictor: Take the six-month average of the 5-year TIPS yield and apply a ratio of 0.65. In recent years, this has been an accurate predictor.

The fixed rate is always rounded to the 1/10th decimal point. In recent weeks the formula been pointing to a new fixed rate of 1.20%, and I confirmed that with data through Friday’s market close:

In the chart, I have included the 10-year real yield as a check. It also predicts a fixed rate of 1.20%. This is not a certainty, but a hopefully an accurate forecast.

New composite rate

Certainty factor: 80%

The new variable rate will be 1.90%, and if the fixed rate is set at 1.20%, the I Bond’s new composite rate for purchases from November 2024 to April 2025 will be 3.11%, down from the current 4.28%. For I Bonds with the 1.3% fixed rate, the new composite rate will be 3.21%.

While these rates look low compared to current 4-week Treasury yields (4.89%), keep in mind that the permanent fixed rate is much more important than the variable rate or six-month composite rate. A fixed rate of 1.2% or 1.3% means you will get a yield higher than inflation, with total safety, for potentially 30 years.

Plus, as the Fed continues is rate-cutting path, short-term T-bill yields should be falling through much of 2025. I Bonds are best used as a medium- to long-term cash-equivalent investment.

Gift-box purchases

Certainty factor: 50%

As I noted in an article last week, TreasuryDirect is sending emails to its customers with I Bonds stored in gift boxes to deliver those gifts “as soon as possible.” You can read more about that here: “Deciphering TreasuryDirect’s mysterious gift-box email“.

Nothing is certain because the Treasury isn’t giving us full information. But it does appear it wants gift-box purchases to be delivered quickly, either this year or early next year, even if those deliveries would exceed the recipient’s annual purchase limit of $10,000. And that is exactly what many people have been doing (including me), without any problem. See this Bogleheads thread for more discussion.

So it looks like changes are coming to the gift-box program. It may be eliminated entirely for new purchases, either as of November 1 or January 1. Or it may be scaled back to its original purpose, to grant small gifts to grandchildren, for example. Or … nothing will happen and we can shake our heads.

I hope we learn more on Thursday or Friday.

Increase in the purchase cap

Certainty factor: 35%

Several callers to TreasuryDirect have gotten feedback that “changes are coming” to the savings bond program. Plus, recall that the $5,000 paper I Bond option in lieu of the federal tax refund is being eliminated as of January 1.

Here is what I suspect (or maybe it is just my wishful thinking): The Treasury will scale back or eliminate the gift-box program, while at the same time raising the savings bond annual purchase limit to $20,000 or even $30,000.

High use of the gift-box program should have sent a strong signal to the Treasury that the $10,000 purchase limit is too low to meet the demand of even small-scale investors.

When I Bonds were first created in the fall of 1998, the purchase limit was $30,000 per person per year. However, ten years later, the Treasury determined about 98% of all savings bonds were purchased in amounts under $5,000. This triggered a new policy in 2008: a $5,000 limit per calendar year.

The current limit of $10,000 per person went into effect in January 2012. If that $10,000 limit had been adjusted for inflation since 2012, it would be about $13,700 today.

Clearly, it is time to raise the purchase limit. Will it happen? Maybe, maybe not. But I hope we find out on Friday.

• 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).

Posted in Cash alternatives, I Bond, Inflation, Savings Bond, TreasuryDirect | Tagged bonds, personal-finance, Treasury investments | 56 Comments

New 5-year TIPS gets a real yield of 1.670% to potentially lukewarm demand

Posted on October 24, 2024 by Tipswatch

By David Enna, Tipswatch.com

The Treasury’s offering of $24 billion in a new 5-year TIPS, CUSIP 91282CLV1, auctioned today with a real yield to maturity of 1.670%, the lowest for this term since April 2023.

This one is a bit hard to read because of the unusual nature of the October TIPS auction each year, which almost always gets a real yield below the apparent market rate. I talked about this in my preview article on this auction.

The Treasury’s estimate of the real yield of a full-term 5-year TIPS closed Wednesday at 1.82%, but yields have been sliding lower this morning. The most recent TIPS on the secondary market, maturing in April 2029, was trading at about 1.76%. But the new TIPS auctioned each October gets a lower real yield than the April TIPS because it won’t be exposed to weak non-seasonally adjusted inflation in its closing months to maturity.

The key number to look at is the “when issued” prediction for this auction, released just before the close. That number predicted a real yield of 1.641%, so today’s auction result came in higher than expected at 1.670%. The bid-to-cover ratio, a good indication of investor demand, was 2.40, below recent auctions of this term. All of that indicates investor demand wasn’t strong.

The October auction is always a bit of an outlier. Here is the trend in the 5-year real yield through 2024, showing the sharp decline beginning in May and then reversing in late September:

Pricing

This was a new TIPS, so the Treasury set its coupon rate at 1.625%, one notch below the real yield of 1.670%. It will carry an inflation index of 1.00042 on the settlement date of Oct. 31. All this means investors got it at a slight discount, an unadjusted price of 99.786263. Here is how a purchase of $10,000 par would be priced:

Par value: $10,000.
Principal on settlement date: $10,000 x 1.00042 = $10,004.20.
Cost of investment: $10,004.20 x 0.99786263= $9,982.82.
+ accrued interest of $7.15.

In summary, an investor purchasing $10,000 par paid $9,982.82 and will receive principal of $10,004.20 on Oct. 31. The accrued interest will be returned at the first coupon payment.

Inflation breakeven rate

With the nominal 5-year Treasury note trading at 4.01% at the auction’s close, this TIPS gets an implied inflation breakeven rate of 2.34%. I say implied because of the unusual nature of the October auctions. Maybe a better estimate would be around 2.29%. If anyone can find a more-official number, let me know.

Here is the trend in the 5-year inflation breakeven rate through 2024, showing a recent surge in inflation expectations:

Thoughts

TIPS yields were trending slightly lower on Thursday morning, after three weeks of increases. Today’s auction result of a 1.670% real yield looks attractive, despite the appearance it was below the “market.” That’s just the way this October auction works. But it is below the results of October auctions in 2022 (1.732%) and 2023 (2.440%).

No media service covers TIPS auctions live anymore, but I found this snippet a day later from MarketWatch, via MSN, on Friday:

Treasury’s $24 billion auction of 5-year Treasury Inflation-Protected Securities was weak, with below-average bidding by non-dealers, according to BMO Capital Markets strategist Vail Hartman.

This TIPS will be reopened at auction on December 19. Here are results for recent auctions of this term, showing the transition from real yields deeply negative to inflation in 2021: