TIPS vs. Nominals

David Enna, (updated April 16, 2023)

I’ve been writing about inflation-protected investments – Treasury Inflation-Protected Securities and U.S. Series I Savings Bonds – since 2011, and I’ve been investing in these products since 1999. So, how have these investments been doing? I track the performance of every maturing 10-year and 5-year TIPS on this page, as they mature in January, April and July.

To view this at a glance, the annual variance number in the last column shows how the inflation breakeven rate compared to actual 5- or 10-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.

We just completed a decade-long period of inflation running at less than 2.0%. In general TIPS have out-performed nominal Treasurys when the inflation-breakeven rate dropped below 2.0%, especially for 10-year TIPS. But this next decade could be entirely different. Never predict the future decade based on the performance of the past decade.

Click on the images for a larger version.

Notes and qualifications

This chart is an estimate of performance, because for nominal Treasurys it uses a full month of inflation in the beginning and ending months, when actually TIPS accruals are based on a half month for the first and last months, with the origination and maturity occurring on the 15th of the month.

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.


10 Responses to TIPS vs. Nominals

  1. Hi David, First, your comparing nominal and TIPS return tables are very helpful, thanks!! 2: I own TIPS only in my and my wife’s IRA accounts, in fact, I started owning them after I luckily found your website and learnet more about them; 3: I own nomibnals in our taxable accounts; 4: On stating the obvious, each tax situation is unique so returns from TIPS and nominals will vary for everyone.

    Finally, I want to share an observation that I just made after reading Nick Timiraos of WSJ article posted at 2:24pm today. Interstingly, post panedemic, well debated, neutral rate, and contrary to my thinking, is expected to stay low. This means the Fed will need to keep rates high until inflation comes down from 4.9% to around 2%. Barring unexpected events, which happens more often than we want to believe, so far, the Fed seems to be quite successful in bringing down inflation from 9.1% to 4.9% by raising interest rates by only 5% (it’s all relative, I have 80s in mind). If the trend of inflation going down remains intact or recession happens (thought Q2 GDP growth of 2.2% is looking way better than Q1 1.1% growth), we have a limited time (6-9 months) to get a decent income from current rates. The challenge will be on how to reinvest when current nominals mature….ok, our daughter is right about my living way too much in the future, well, too late, she could not pick her biological Dad….:)..thanks again for all the posts and!!!

  2. B.Z. says:

    15-jan-19’s inflation breakeven of 0.12% seems like an anamoly (for lack of better words). Six months before the market was thinking of an inflation rate of 2.49% and six months after 1.58%.

    So if someone bought TIPS at that time they were guaranteed a real yield of 2.245% which is PRICELESS!

    So if the annual inflation was in the range of 6.5% then the equivalent nominal yield for holding that TIPS will be 8.745% correct?

    Besides numbers, below is what I am thinking as guidelines to determine whether to invest in TIPS or not.

    1) Lower the breakeven the more attractive TIPS gets.
    2) A real yield of 1.5% for 10 year is really attractive.
    3) Don’t buy TIPS if one does not want to hold it for maturity. Trading in TIPS is not for a simple minded investor like me.

    • Tipswatch says:

      In this listing, the Jan 2019 TIPS matured in January 2019 and was issued in January 2009. That was in the depths of the financial crisis and investors were selling off everything. So an inflation breakeven rate of 0.12% was an anomaly, as you note. Inflation over the next 10 years ended up averaging 1.7%, but even then this TIPS did quite well.

      I agree with your points 1 – 3.

  3. Vesuvius says:

    Hi David, I’m new to this but am coming around to the view that, vis-a-vis TIPS, nominal treasuries are essentially for those who want to speculate on future inflation rates. Buying TIPS and holding through maturity locks in a guaranteed pre-tax real rate of return whereas nominals lock in a guaranteed pre-tax nominal RoR, with the real RoR fluctuating based on how actual inflation turns out relative the the break-even expected rate at purchase. For the investor who has no interest in speculating on inflation, is there some other reason I’m missing as to why he would choose to include some nominals in his portfolio? Thanks!

    • Tipswatch says:

      Nominals protect against deflation, and are excellent short-term investments. I like to own a mix.

      • Vesuvius says:

        Thanks, but deflation doesn’t affect the TIPS real RoR, right? And, if living expense move reasonably in line with inflation/deflation, it’s real RoR that matters, yes? If so, it seems like “nominals protect against (unexpected) deflation” is just the flip side of “nominals leave one exposed to (unexpected) inflation”, which gets back to speculating. I may be missing something, but I’m still not seeing why I should prefer a mix if I’m not interested in speculating on inflation. Thanks!

        • Tipswatch says:

          Consider: Nominal bond pays 4%, at a time of 2% deflation your real return is 6%. TIPS pays 1.5% real. TIPS lose out in this scenario.

          • Vesuvius says:

            Oh, for sure. I’m not saying nominals can’t ever result in better real RoR over TIPS. It doesn’t even take deflation for that to occur, just lower than expected (i.e. breakeven) inflation will do that trick. But that’s just speculating on actual inflation vs. market-projected inflation and winning. I’m asking for the investor who doesn’t want to bet against the market expectation and speculate on inflation, if there’s any reason to not just buy TIPS.

  4. pankr003 says:

    Here is a topic you may have covered but some people may not know about and it may not be a good idea. See

    Buyer beware:)

  5. James Arens says:

    Thanks for the post. The detailed information in the tables above is very helpful.

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