Projection: Social Security COLA for 2025 should be around 2.7%

Posted on July 28, 2024 by Tipswatch

By David Enna, Tipswatch.com

The recent release of the June 2024 inflation report created a baseline number for next year’s cost of living adjustment for Social Security recipients. It’s all based on a needlessly complex formula the Social Security Administration uses to set the COLA each year.

  • The index. The SSA does not use the standard measure of inflation that you see reported each month. Instead it uses CPI-W, the Consumer Price Index for Urban Wage Earners and Clerical Workers, which often runs slightly lower than the standard CPI-U.
  • The time period. Instead of using an annual rate of inflation, the SSA looks at only the average of three months, July to September, and compares that to the average from a year earlier. Last year, for example, the three-month average was 301.236, an increase of 3.2% over the average for 2023. So the 2024 COLA was set at 3.2%, even though annual U.S. inflation was running at 3.7%.
  • The summer months. Inflation can be notoriously volatile in the months of July to September. We could easily see a month of high-ish inflation, or an another month of deflation, as we saw in June. That means any Social Security COLA projection — including mine — is just an educated guess.

For June, the BLS set the CPI-W index at 308.054, an increase of 2.9% over the last year. So does that mean the Social Security COLA will end up being 2.9%? No, because only the next three months — July to September — matter in this equation.

In this chart, I have provided four potential monthly inflation scenarios for the July to September period — 0.0% per month to 0.3% per month — and then calculated the effect on the eventual Social Security COLA.

Most likely, none of these scenarios will end up being accurate. Anything can happen, including a bout of deflation. But I think the scenario with the highest probability is inflation averaging 0.2% a month over the three months, resulting in a Social Security COLA of 2.7%.

So my projection is 2.7%. That is a drop from 2024’s increase of 3.2% and is below the current rate of U.S. inflation, at 3.0% for the year ending in June.

As of May 2024, the average Social Security benefit check was $1,778.24, according to the SSA. An increase of 2.7% would raise the average to $1,826.25.

What others are saying

I wrote everything above before looking at any other projections for the Social Security COLA. In my experience, many of these forecasts are wildly off base.

One group I trust is the Senior Citizens League, which crunches a lot of data in developing its forecast. The group is projecting a COLA increase of 2.63% for 2025, which would effectively round to 2.6%.

I’ve seen other projections as high as 3.0%, which could happen but seem unlikely.

SSA COLA versus CPI

In general, the combination of using CPI-W and the smoothing effect of a three-month average results in the Social Security COLA being lower than annual CPI. The Senior Citizens League has lobbied for years to replace CPI-W with CPI-E, and index that more accurately reflects costs faced by older Americans.

For 2024 the COLA was 3.2% even though CPI-U increased 3.7% over the September 2022 to September 2023 period. In some years, however, the COLA has outpaced official inflation. That doesn’t look likely for 2025.

Also read: Does The Social Security COLA Shortchange Seniors?

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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.

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 Inflation, Medicare, Retirement, Social Security | 25 Comments

A 10-year TIPS matured July 15. How did it do as an investment?

Posted on July 21, 2024 by Tipswatch

By David Enna, Tipswatch.com

On July 15, an ugly-duckling 10-year Treasury Inflation-Protected Security matured. It was CUSIP 912828WU0, first auctioned on July 24, 2014.

I call it an ugly-duckling because the auctioned real yield was 0.249%, setting its coupon rate at just 0.125%, the lowest the Treasury will go for any TIPS. In addition, on auction day it got a inflation breakeven rate of 2.26%, rather high at a time when U.S. inflation was hovering around 2.0%.

In my preview article on this auction, I wasn’t a huge fan:

It’s possible that this new TIPS will auction with the lowest yield to maturity for any 9-to 10-year TIPS since May 2013, when the yield was -0.225%. Since then – for six consecutive auctions – the lowest yield to maturity has been 0.339%.

Nevertheless, CUSIP 912828WU0 turned out to be a fine investment, at least compared with a nominal 10-year Treasury note, which was yielding 2.51% on the day of the auction. Inflation over the next 10 years ended up averaging 2.8%, making this TIPS a better investment by a wide margin with an annual advantage of 0.538% in yield over the 10 years.

Data from Eyebonds.Info show this TIPS produced an annualized nominal yield of 3.048% over the 10 years, much higher than the 10-year note’s 2.51%.

I didn’t buy this TIPS at that auction, but I jumped aboard on the Sept. 18, 2014, reopening auction, when the real yield rose to a more attractive 0.610%. On that day, the 10-year Treasury note had a nominal yield of 2.63%, creating a breakeven rate of 2.02%. The September purchase was also a winner, with a nominal return of 3.445%:

Data from Eyebonds.info

TIPS versus an I Bond

If you purchased an I Bond in July 2014, it had a fixed rate of 0.10%, below the real yield of 0.249% for the TIPS at the original auction. That I Bond has produced a nominal return of about 2.94% according to Eyebonds.info. So the TIPS is the winner, but not by a great margin. The I Bond benefits from better compounding, since all interest payments are added to principal until redemption.

Thoughts

TIPS have been on a winning streak for several years, caused by the surge to 40-year high inflation that peaked in June 2022 at 9.1%. Even today, annual inflation is running higher than the auctioned breakeven rates of 2014. And so TIPS have been the winners versus nominal Treasurys, at least recently.

Notes and qualifications

My chart is an estimate of performance comparing inflation breakeven rates versus actual inflation.

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.

• 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).

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.

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 I Bond, Inflation, Investing in TIPS, Savings Bond | Tagged , , , | 11 Comments

New 10-year TIPS gets real yield of 1.883%

Posted on July 18, 2024 by Tipswatch

By David Enna, Tipswatch.com

Biella, a town of about 40,000 people, is situated in the foothills of the Alps. Among other things, this area is famous for the production of vermouth.

I am writing this after an evening out in Biella, Italy, and while struggling with rather weak Internet. So this is going to be brief.

The U.S. Treasury’s auction of $19 billion of a new 10-year Treasury Inflation-Protected Security, CUSIP 91282CLE9, generated a real yield to maturity of 1.883%. The coupon rate was set at 1.875%, the highest for this term since July 2009. That was 88 auctions ago for this term of TIPS.

While the coupon rate set a milestone, the real yield to maturity was below the last two auctions of this term, which hit a multi-year high of 2.184% in a reopening auction on May 23, 2024. That was CUSIP 91282CJY8, which was trading Thursday morning with a real yield to maturity of about 1.91%, a bit higher than this auction result.

The “when issued” prediction for this new TIPS, set just before the auction’s close, was for a real yield of 1.865%. The auction came in a bit higher at 1.883%, which indicates slightly weak demand. The bid-to-cover ratio was 2.38, slightly higher than recent auctions of this term.

So … all things considered … this looks like a routine auction. No surprises.

Pricing

This TIPS will have an inflation index of 1.00086 on the settlement date of July 31. It auctioned at an unadjusted price of 99.926982. Those two factors combine to create an adjusted price of 100.012919.

So an investor purchasing $10,000 par value of this TIPS will be receiving $10,008.60 in principal on the settlement date, at a cost of about $10,001.29, plus about $8.16 of accrued interest, which will be returned at the first coupon payment in January.

This TIPS auctioned at a total cost very close to par value, which is the amount guaranteed to be returned at maturity, even after a severe period of deflation. (That is comforting, but a very, very minor issue.)

Inflation breakeven rate

With a 10-year Treasury yielding 4.18% at the auction’s close, CUSIP 91282CLE9 gets an inflation breakeven rate of 2.27%, lower than the last four auctions of this term. This means the new TIPS will out-perform a similar Treasury note if inflation averages more than 2.27% over the next 10 years.

Here is a history of TIPS auctions of this term over the last three years:

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• 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 (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.

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 Inflation, Investing in TIPS | Tagged , , , , , | 16 Comments

Thursday’s 10-year TIPS auction could mark trend of lower yields

Posted on July 14, 2024 by Tipswatch

By David Enna, Tipswatch.com

The U.S. Treasury on Thursday will offer $19 billion in a new 10-year Treasury Inflation-Protected Security, CUSIP 91282CLE9. The coupon rate and the real yield to maturity will be set by the auction’s results.

This will be an interesting auction because last week’s inflation report for June showed deflation of -0.1% for all-items prices, and that triggered the 10-year real yield to fall to 1.94% at Friday’s close, the lowest level since March 28. The 10-year real yield has fallen 34 basis points since hitting a 2024 high of 2.28% on April 30.

It’s impossible to say where real yields will be heading this week. The bond market has been volatile, but the apparent cooling of the U.S. economy, combined with weakening inflation and a more dovish Federal Reserve could send yields even lower.

Definition: A TIPS is an investment that pays a coupon rate well below that of other Treasury investments of the same term. But with a TIPS, the principal balance adjusts each month (usually up, but sometimes down) to match the current U.S. inflation rate. So, the “real yield to maturity” of a TIPS indicates how much an investor will earn above inflation each year until maturity.

Facts about this auction:

  • The auction size of $19 billion is the largest in the history of the Treasury’s 10-year TIPS offerings. It’s about 12% higher than a similar auction in July 2023. Could increasing auction sizes result in weaker investor demand? So far, that hasn’t been the case.
  • This TIPS will carry an inflation index of 1.00086 on the settlement date of July 31. That amounts to just $8 on a $10,000 investment, so it is likely that this new TIPS will auction with an investment cost close to — or just below — par value of 100, even with the additional principal added in.
  • At this point it would appear the auctioned real with to maturity will be somewhere around 1.94%, which was the Treasury’s yield estimate at Friday’s close. That would set the coupon rate at 1.875%. The Treasury updates its estimate at each market close on this page.

Here is the trend in the 10-year real yield over the last four years, showing that yields remain at attractive levels even after the recent decline:

Click on image for larger version.

Inflation breakeven rate

The Treasury estimates the nominal yield of a 10-year Treasury note closed Friday at 4.18%, which creates an inflation breakeven rate of 2.24% for a new 10-year TIPS, based on data from Friday. Things will change before the auction, but a breakeven rate of 2.24% would be the lowest for this term since July 2022.

The breakeven rate is important because it sizes up the TIPS versus a nominal Treasury. If you think inflation will average more than 2.24% over the next 10 years, you buy the TIPS. If not, you would favor the nominal Treasury.

Here is the trend in the 10-year inflation breakeven rate over the last four years:

Click on image for larger version.

Thoughts

It’s impossible to know where real yields are heading. The current trend seems to point to lower yields, but this is a volatile market. I believe a 10-year real yield around 1.94% remains attractive. Last year, the July 2023 auction of a new 10-year TIPS resulted in a real yield of 1.49%, well below the current market.

I won’t be a buyer because I have already filled the 2034 rung of my TIPS ladder with purchases of the January 10-year, CUSIP 91282CJY8. My initial purchase in January got a real yield of 1.810%, so 1.94% doesn’t look bad.

If you are thinking of investing in this TIPS, you can track the Treasury’s yield estimates here and see real-time yields for the January 2024 TIPS here. This TIPS auction closes Thursday at 1 p.m. ET. Non-competitive bids at TreasuryDirect must be placed by noon Thursday. If you are putting an order in through a brokerage, make sure to place your order Wednesday or very early Thursday, because brokers cut off auction orders before the noon deadline.

I plan on posting the auction results sometime Thursday (but I am in Alpine Europe and I can’t be sure when that will happen.)

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

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• 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 (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.

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, Inflation, Investing in TIPS | Tagged , , , , , , | 7 Comments

In a surprising turn, inflation turned to deflation in June

Posted on July 11, 2024 by Tipswatch

For the markets and the Fed, June’s inflation report was positive news.

By David Enna, Tipswatch.com

As soon as I arrived in Geneva, Switzerland, this afternoon, I began looking for news on the June inflation report. My arrival was timed — not by choice — close to the release by the Bureau of Labor Statistics at 8:30 a.m ET.

The news was surprising: The Consumer Price Index for All Urban Consumers declined 0.1% on a seasonally adjusted basis, after being unchanged in May, the BLS reported. Annual inflation fell from 3.3% in May to 3.0% in June. Core inflation, which removes food and energy, rose 0.1% for the month and 3.3% for the year, down from 3.5% in May. This was the smallest 12-month increase in core inflation since April 2021.

All of these numbers were below consensus estimates, indicating that inflation could be slowing a bit more than economists — and even the Federal Reserve — had been anticipating. June’s deflation was slight, only negative 0.1%, but the annual rate dipped for both all-items and core inflation.

Gasoline prices, which fell 3.8% in June, again were an important factor in the decline in all-items inflation. Gas prices are now down 2.2% for the year. Shelter costs rose a reasonable 0.2% in June, but are up 5.2% over the last year. Food at home costs rose 0.2% for the month and are up 2.2% over the last year.

Here is the trend in all-items and core inflation over the last 12 months showing the recent disinflationary pattern:

In my opinion, this is exactly the trend, at least since March, that the Federal Reserve has been hoping to achieve.

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 on TIPS and set future interest rates for I Bonds. For June, the BLS set the inflation index at 314.175, an increase of just 0.03% over the May number.

For TIPS. The June inflation report means that principal balances for all TIPS will rise 0.03% in August, after rising 0.17% in July. Here are the new July Inflation Indexes for all TIPS.

For I Bonds. The June report is the third in a six-month string that will determine the I Bond’s new inflation-adjusted variable rate, which will be reset on November 1 and eventually roll out to all I Bonds, depending on the original month of purchase.

As of June, inflation has increased only 0.59% over the three months, which would translate to an I Bond variable rate of 1.18%, a disappointing number. But three months remain. A more likely scenario would bring the variable rate up to around 1.80%, still well below the current rate of 2.96%. I Bonds could be a tough sell in November, especially if the permanent fixed rate slips lower than the current 1.3%.

Here are the data so far:

What this means for future interest rates

The Federal Reserve faces an interesting dilemma. I watched Chairman Jerome Powell testify before Congress earlier this week, and he was repeatedly lectured by Republicans to avoid the “optics” problem of cutting interest rates just before the 2024 presidential election. Powell sidestepped that question.

I still think a September rate cut of of 25 basis points is possibility. From today’s Wall Street Journal report:

After the release of the report, investors dialed up bets that the Fed would cut rates twice this year, and the odds of a third cut climbed, implying the central bank could lower rates at its last three meetings of the year, in September, November, and December.

And here is commentary from inflation analyst Michael Ashton:

Overall, there’s no doubting that this number is soothing for the Fed. It’s soothing for me too. Inflation is decelerating, and as I said last month I think the Fed will almost certainly deliver a token ease in the next couple of months. …

The potential issue is that inflation isn’t slowing for the reason the Fed thinks it is. The economy is slowing, and unemployment is rising. … An ease will follow shortly. Whether that is followed by further eases remains to be seen, but…for now…the trends are favorable for the central bank.

And now, I am going to restart my vacation.

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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.

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 , , , | 6 Comments