Treasury Inflation-Protected Securities

• The inflation numbers came in close to the consensus, but year-over-year core inflation came in slightly high at 2.4%.
• Investors are pricing in extremely low inflation over the next 10 years. Is this an overreaction to short-term news? Yes, I think so.
• I Bond investors can expect a lower variable rate coming at the May 1 reset. My recommendation: Buy I Bonds, up to the purchase cap, before May 1.

U.S. inflation continued in the “moderate zone” in February, but rising turmoil in the stock and commodity markets could bring a short-term swing to deflation in coming months.

The Consumer Price Index for All Urban Consumers rose 0.1% in February on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, “headline” inflation increased 2.3%.

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• Series I Savings Bonds purchased through April 30 will have a permanent “real yield” of 0.2%, well above TIPS yields of any maturity.
• I Bonds carry many benefits over TIPS, including tax-deferred interest and rock-solid deflation protection.
• Another Savings Bond, the EE Bond, is also very attractive under current terms, offering a 3.5% return for anyone who can hold it 20 years.

I’ve been writing about TIPS and I Bonds for nearly 10 years, and there have few times when I Bonds have reached the level of a SCREAMING BUY. Right now, in March 2020, it’s time to say: “I Bonds are a screaming buy.”

I’ve been pounding the table for I Bonds in recent months, often calling them the best inflation-protected investment in the world. But we’ve now reached a point where I Bonds are amazingly superior to similar very safe investments.

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• The real yield of 0.261% was the lowest for any 29- to 30-year TIPS auction in history, and much lower than the previous record of 0.479%.
• The coupon rate also set a record low of 0.250%, much lower than the previous record of 0.625%.
• Long-term real yields are in a “weird” zone. Beware.

The U.S. Treasury’s auction of a new 30-year Treasury Inflation-Protected Security went off Thursday with a sensational result: A record low real yield of just 0.261%, well below any 29- to to 30-year TIPS auction in history.

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