Q&A on TIPS

David Enna, Tipswatch.com (posted originally in March 2011; updated June 17, 2022)

A little story. Back in 1999 I was at a cocktail party, and of course, the conversation drifted toward the red-hot stock market, as  it always did in 1999. What were you buying? Cisco? AOL? Something-or-other.com?

I said, “I’ve been looking at TIPS, Treasury Inflation-Protected Securites.”

Blank stare from the group standing around me, which included several investment professionals.

“No really, TIPS are paying 4% above inflation and are rock-solid safe. Where can you find another investment like that?”

Blank stare. Oh well, change subject.

I did end up buying TIPS that year, and many years since, directly through TreasuryDirect for awhile and now through a brokerage in a traditional retirement account. Those TIPS I bought in the late 1990s were fantastic investments, returning 3 to 4% above inflation while the stock market had a negative real return over the same time.

Sure, I had money in the stock market, too. But the TIPS investments were sort of ballast for my financial ship. That investment was not going down. That investment was 100% safe.

So today, TIPS are nowhere near as appealing, paying a yield to maturity that’s negative to inflation well up the maturity ladder. And this is at a time that the stock market seems pretty fairly valued. And yet TIPS are now massively popular — go figure.

The reason is: The risk of inflation is lurking. If it strikes, and I think it will, your regular bond investments (especially in mutual funds) are going to take a big hit. TIPS mutual funds will also be hit — be sure of that.

My premise is to buy and hold TIPS directly from the Treasury and hold them to maturity. It is not a sexy strategy. But is a safe strategy, if you build a collection of these investments over time. And you invest only 15% to 20% of your portfolio this way, meaning you keep stock market exposure, and some CDs, bond funds, etc.

Key Facts:

  • TIPS are issued in terms of 5, 10, and 30 years.
  • The real yield to maturity and cost of a TIPS are determined at auction.
  • TIPS are sold in increments of $100. The minimum purchase is $100.
  • TIPS are issued in electronic form.
  • You can hold a TIPS until it matures or sell it in the secondary market before it matures.

Answers to reader questions

Who should buy Treasury Inflation-Protected Securities?

First off, I want to state loudly that TIPS are for preserving wealth, not building wealth. If you are in the early stages of investing and far from your long-term needs for buying a house or for paying for college or especially for retirement, TIPS aren’t going to be a great investment. That’s especially true when yields are less than 1% over inflation. You probably won’t build enough wealth to meet your goals.

However, if you are nearing retirement, or in retirement, and have an adequate nest egg, then TIPS make sense as part of your investment portfolio – especially if you buy and hold them to maturity. That strategy is risk-free, and you can protect a part of your savings from the dangers of unexpected inflation.

Even then, I think TIPS, I Bonds and bank CDs should make up no more than 30% of your portfolio. Put the rest in stock and bond index funds, whatever matches your risk tolerance. In the past, I have suggested something like:

  • 10% Highest risk: International, small cap stock index funds
  • 30% Higher risk: U.S. stock index funds
  • 35% Lower risk: Broadly diversified bond funds, municipal bonds
  • 25% No risk: TIPS, I Bonds, insured bank CDs, Treasuries held to maturity

I Bonds are a special case, since there is a limit on purchases of $10,000 per person per year. If you want to build a large stake, you need to start early. I think I Bonds could work well for almost any investor. They are flexible enough to be a 1-year savings account, or a 30-year investment, with taxes deferred.

What is the difference between the ‘coupon rate’ and the ‘yield to maturity’?

When a TIPS is first auctioned, a coupon rate is set to a rate slightly below the ‘high yield’ bid accepted by the Treasury. Once the coupon rate is set, it stays with that TIPS through its entire term, and determines the interest rate paid on the par value, which climbs with inflation.

At the same time, the high yield becomes the yield to maturity for that TIPS, on the day of the auction. The buyer is paying either a premium or discount to par value, and that creates the actual yield.

Once a TIPS is issued, it can be traded on the secondary market, and its yield to maturity will change each day.

So, for example, on Jan. 23, 2014, the Treasury auctioned new TIPS with a coupon rate of 0.625% and a yield to maturity of 0.661%. Buyers paid about $99.55 for $100 of value to get a coupon rate of 0.625%, and the resulting yield was 0.661%.

On March 20, the Treasury reissued this same TIPS, which still has a coupon rate of 0.625%. On that date, the market set a yield to maturity of 0.659%.

Once set, the coupon rate never changes, but the yield to maturity constantly changes and that causes the market value of the TIPS to rise and fall on the secondary market. If you are holding to maturity, no big deal – ignore the fluctuations.

Does an investor’s real yield to maturity change over time?

Once a TIPS is auctioned it begins trading on the secondary market and its price versus par value will change, sometimes minute by minute, and that also changes the real yield to maturity for a buyer making an investment at that moment. But once you make a TIPS investment that you intend to hold to maturity, the real yield to maturity is set for that investment. If you bought a TIPS and got a real yield to maturity of 0.75%, then you are going to earn 0.75% over inflation for the term of the TIPS, if you hold to maturity.

Buying TIPS at auction: If I place a non-competetive bid for say $1,000, do I need to pay more than $1,000 if the auction ends above par? Or will my purchase price still be $1,000 but with a reduced yield?

When purchased on TreasuryDirect, the price of a TIPS can be less than, equal to, or greater than the face value you are purchasing.

The ‘coupon’ yield does not change, but the price you pay can be higher or lower than the amount of TIPS you are buying. This is from TreasuryDirect.gov:

The price of a fixed rate security depends on its yield to maturity and the interest rate. If the yield to maturity (YTM) is greater than the interest rate, the price will be less than par value; if the YTM is equal to the interest rate, the price will be equal to par; if the YTM is less than the interest rate, the price will be greater than par.

For example, in the April 2011 auction of a 5-year TIPS, you would have paid $5,087.95 for $5,000 of that issue, since that TIPS had a coupon rate of 0.125% but the auction rate was negative 0.18%.

Why does the Treasury issue TIPS with a coupon rate of 0.125% even though the yield to maturity will end up being negative?  

So far, the Treasury hasn’t been willing to issue a TIPS with a zero or negative coupon interest rate. So when yields are negative, it sets the coupon rate at 0.125% and then lets buyers pay up at auction to get the resulting yield that is negative to inflation.

Could the coupon rate be zero? I don’t see why not, in theory. I Bonds can have a zero base interest rate, but they get the inflation add-on, so I Bonds can’t go below zero interest, even if inflation is negative. That makes I Bonds more attractive than TIPS at pretty much all maturities, if the real yields are similar.

If I buy via Treasury Direct and pay more than par or $100, say $107.06 for a coupon rate of 0.125% to result in a negative yield, then is the $7.06 premium ‘protected’ if chronic deflation sets in? In other words, at maturity will the Treasury reimburse principal of 100, or of 107.06?

When you pay $107.06 for a TIPS at auction, you are paying up to receive that 0.125% coupon rate. After ten years, you get back $100, plus any inflation adjustment to principal. So you are paying $107 for $100, simple as that. If we suffered through chronic deflation for 10 years, you’d get back $100.

But … since you’ve been paying taxes on that 0.125% interest all those years, you can take a long-term capital loss on the purchase price difference. (I am not a tax attorney, so don’t trust me.)

TIPS protect you against ‘chronic deflation’, sort of, since you will get at least the $100 back at maturity, no less, plus you would have earned 0.125% over the 10 years. Earning 0.125% in a time of long-term deflation is not so bad.

(I Bonds are better in times of deflation, because your principal balance will never go down. The worst you could see is a period of time with zero interest.)

If you own a TIPS with substantial inflation appreciation – I bought some 30-years back in 1999, for example – then a month of deflation lowers your principal balance, just as inflation would raise it. That’s happened a few times in the last decade.

How often does the value of the principal get updated in TreasuryDirect to reflect the CPI?

The adjustment is daily, based on the non-seasonally adjusted Consumer Price Index (CPI-U). But since the Treasury only pays interest twice a year, the effective adjustment happens with each interest payment, a half a year at a time.

If you want to track the value of your holdings, I find this Barrons chart helpful. It shows the updated accrued principal for each issue.

What is the difference between new and reissued TIPS?

While they are all Treasury Inflation-Protected Securities, there are slight differences.

New issue. The Treasury does a TIPS auction each month, and sometimes it is a new issue. That means the base interest rate (coupon rate) and yield to maturity will be set at auction. So for a new issue, you won’t know coupon rate for certain, and the yield you get will end up close to the coupon rate, as long as the yield is positive. The price you pay for the TIPS will be close to par value, as long as the yield is positive.

Reissue. When the Treasury reissues (also called ‘reopens’) a TIPS, it carries the coupon rate from the original auction. A few months will have passed, so the yield could have moved up or down from the coupon rate, meaning the price you pay for the TIPS could be less or more than par value.

Once a TIPS is issued, it trades on the secondary market, so it is easier to estimate its likely value at auction. With a new issue, the price can be a little harder to estimate.

Take a look at this post for a recap of all the new and reissues of 2021 and you can see the pattern:.

When I buy a TIPS, how can I tell if I am going to pay a premium or discount to par value?

For a new TIPS issue going to auction, the coupon rate will be set slightly below the yield to maturity that results from the auction. Coupon rates rise in 0.125% increments. So if the TIPS auctions with a yield of 0.663%, the coupon rate will be set at 0.650% and the buyer will get it at a slight discount to par.

But this does not hold true when the yield to maturity is negative. In that case, the coupon rate is set at 0.125%, the lowest it can go, and the buyer pays a premium to make up the difference.

For reopening auctions, a buyer can look at sources of secondary-market information on the current market yield of the TIPS being auctioned. That can give the buyer an indication of whether the TIPS is going to go off at a discount or premium to par.

A reliable source is the Wall Street Journal’s chart of closing TIPS prices. You need to know the maturity date of the TIPS that’s being auctioned, then check the price on that chart. Here is an example for a TIPS with a coupon rate of 0.625%:

exampleIn this case, the yield is 0.583%, so a buyer today would need to pay a premium, which in this case is about $100.40 for $100 of value, based on the asked price of 100.13. By the way, the .08 and .13 in that chart actually mean 8/32 and 13/32, not cents. The Wall Street Journal explains this:

Figures after periods in bid and ask quotes represent 32nds; 101.26 means 101 26/32, or 101.8125% of 100% face value; 99.01 means 99 1/32, or 99.03125% of face value.

Also, the accrued principal will factor in what you pay for a reopened TIPS, because you are also getting the existing boost from inflation since the TIPS was first issued. In this case, accrued principal of 1001 is very small and not much of a factor. If it is higher, it will factor into what you pay, but you are also getting the additional principal.

83 Responses to Q&A on TIPS

  1. applebow555 says:

    Thanks so much for all the helpful insights! I bought TIPS in a brokerage IRA account (Fidelity). Is there any special handling for TIPS for specifying the beneficiaries to inherit? I’m asking because of the Treasury FS Forms I’ve read about — do those only apply if the bonds are held via Treasury Direct?

  2. William says:

    Does the quoted real yield to maturity of a TIP held to maturity assume the the semi-annual interest payments are re-invested in the original TIP? Since that’s not practical, will the realized YTM actually be lower than the quoted YTM at purchase?

    • Tipswatch says:

      The real yield to maturity does include the coupon rate, but the coupon rate is paid out as current income and not reinvested. As the principal balance grows, the coupon payment also grows, but is paid out twice a year. You can reinvest the coupon interest however you want, so it could be a positive or negative that it isn’t re-invested. Same thing with a nominal 5-year Treasury; the coupon interest is paid out as current income and not reinvested. This is another advantage I Bonds have over TIPS, in my opinion.

  3. rick says:

    Thank you VERY MUCH for sharing your knowledge and insights about TIPS and I Savings Bonds.

    What happens if I buy individual TIPS via TreasuryDirect, and then life circumstances (or anticipated upcoming deflation 🙂 cause me to want to sell them before maturity? Is there a way to sell them directly from a TreasuryDirect account (or move them to a brokerage firm to do so)?

    Thanks again!

    • Tipswatch says:

      You cannot sell TIPS at TreasuryDirect. You’d have to use what TD calls the “Commercial Book-Entry System” to transfer the TIPS to a broker. That may involve filling out a form and getting a signature guarantee. (I Bonds, however, can be sold through TreasuryDirect’s website.)

  4. Pingback: Attention investors: TIPS are now a viable, attractive alternative to I Bonds | Treasury Inflation-Protected Securities

  5. Bill says:

    May 19, 2022 post:
    “It’s not spectacular, but very welcome news for TIPS investors. Keep in mind that this TIPS, with a real yield of 0.232%, could out-perform the highly coveted U.S. Series I Bond, with a real yield of 0.0%. (Because of the I Bond’s better deflation protection, though, the I Bond will still probably end up with a slight edge.)
    The I Bond has a 6-month 9.62% rate. New rate Nov 1. Can you explain how the TIPS is a better place to earn interest than the I Bond?

    • Tipswatch says:

      Over the next 10 years, that TIPS (purchased on the day of the auction) will have a yield 0.232% higher than official US inflation. An I Bond purchased today does have a nominal yield of 9.62%, only because of high inflation in a previous 6 months. Going forward, the I Bond will yield 0.0% over inflation. I am not saying a 10-year TIPS is better, but it is certainly competitive.

  6. Let’s say I buy a TIP bond ETF with a duration of appx 2 years. Does it mean that after 2 years if I sell the ETF units, I am guaranteed at least my purchase price + the dividends received? Specifically , if the ETF rolls forward to maintain the duration is there such a clean exit as if I had bought an individual 2 year TIP?

    • Tipswatch says:

      In theory, yes, but in reality, there is still risk you’d have less than your original investment. This would happen if real yields rose suddenly at the end of the 2 years (our current situation). So then you might need another two years to recover. But of course you also get inflation accruals, which could be up or down.

  7. Matt says:

    Hi, I would like to buy some TIPS to hold to maturity; given that the real rates are increasing, would it be a good idea to wait a few months? If so, any advice on deciding the “right” time to buy? (For example, do you have any sense of how high the real rates will get in the next few months?) Thank you.

    • Tipswatch says:

      It’s impossible to predict when it is the “right time to buy,” because conditions are always changing. I’d say that conditions in May 2022 are better than they have been in the last couple of years. Will that last? I’d say I think that real yields will continue to climb higher, assuming the economy doesn’t go into a tailspin. I think we remain in the early stages of this rate-rising period, but I have no way to know if that is true. If you are holding to maturity, now is not a “bad” time to buy.

  8. Barry Wasserman says:

    I’d like to re-visit the question of TIPS fund vs individual TIPS bonds issue. My understanding is that there is very little real world difference between buying an individual bond or bond fund with the same real yield and the same average maturity, and that this is equally true for all types of bonds and bond funds of the same credit worthiness and term. So, for example, if one buys a TIPS bond fund with an average maturity of 7 yrs, after 7 years the total return of the fund would be about equal to the total return of a similar individual bond at maturity. The only reason the bond fund seems more volatile is because it is publicly marked to market constantly. Meanwhile the individual bond only appears to be stable so long as the owner doesn’t check its buy/sell price on the secondary market. Am I missing something?

    • Tipswatch says:

      I’d say that in pure theory, yes, there is very little difference. You can find many people at the Bogleheads forum who will argue this point, and I’d say sure, sounds good. However, when I buy an individual TIPS, I know I will hold it to maturity and I don’t really care how the market fluctuates. I will receive x% above or below official U.S. inflation, for the term of the TIPS. With a TIPS mutual fund, it is impossible to make a definitive estimate of performance. The TIP ETF was down 1.45% today. My portfolio of TIPS gained from inflation accruals today and I don’t care what happened to the market price.

      Do I live in a fantasy world? I suppose so, but I prefer individual TIPS for the certainty and predictability of the return. Still, I also own two TIPS ETFs — SCHP and VTIP — in a traditional retirement account. So I am not against owning a TIPS fund. I’d just prefer to pick individual TIPS at auction when the real yield looks inviting.

      • Michael Wang says:

        I like David’s buy-and-hold approach to investing in individual TIPs. I would buy individual TIPs if I know I can afford to hold it till maturity and not have to use that money before maturity. If one is psychologically disturbed by daily market fluctuations (particularly “mark-to-market” losses) to the point of losing sleep at night, then buying individual TIPs would not be the right thing to do. Personally, I doubt Federal Reserves would raise interest rates to levels above inflation as measured in CPI-U, so owning newly issued individual 5 and 10 year TIPs via auctions and hold them till maturity in my IRA account might just do better than buying conventional bonds in that scenario. Am I missing anything, David?

        • Tipswatch says:

          Thanks Michael. I have been saying for years that I would like to be a net buyer of TIPS, buying more than those that mature, but I haven’t been able to do that in recent years. Here comes our opportunity.

  9. Michael Wang says:

    Hi, David,
    I accidentally came upon your website while I am researching TIPs. Thank you for your great work. I like your site very much. Question, I just bought $10,000 worth of 30-year 0.125% TIP due 2/15/52 in my IRA account in the secondary market. Although I plan to hold it to maturity, can you comment on the chances I can sell this TIP at stated inflation adjusted principal 10 years ahead of maturity, i.e. in 2042?

    • Tipswatch says:

      It’s impossible to predict anything that long into the future. I never thought I’d see a 30-year TIPS with a negative real yield, but then the pandemic hit. I’m assuming you got a real yield around 0.30%? So your return should exceed inflation if you hold to maturity, even though you could see some wild swings in market value in the early years.

    • Michael Wang says:

      Thank you David for your timely response to my question. Can you kindly comment on the difference between a TIP’s inflation adjusted principal (which I understand to be the beginning principal of $1,000 per bond times the daily inflation factor) and the same TIP’s “inflation adjusted value” (which my brokerage account defines as daily closing market price times the day’s inflation factor)? Although the two are generally different at time of the issue and afterwards, shouldn’t the two be the same as the TIP reaches maturity?

      • Tipswatch says:

        There are two factors in the price you see listed at the brokerage: 1) the premium or discount the TIPS is selling at because the real yield to maturity is higher or lower than the coupon rate, and 2) the accrued principal, which rises (or sometimes falls) each day based on non-seasonally adjusted inflation two months ago.

        The daily closing price you see each day at the brokerage is: par value x inflation index x premium or discount.

        But the actual accrued value of the TIPS (ignoring market swings) is par value x inflation index. At maturity, you get par value x inflation index, plus the final coupon payment.

        As the TIPS nears maturity, the premium or discount will get smaller, but it still will be affected by the final coupon payment at maturity. Accrued principal changes each day, usually higher, until the TIPS matures.

        • Michael Wang says:

          Thank you, David, for your answers. I have recently bought a moderate amount of 5, 10 and 30 year TIPs issued in 2022 and plan to increase these holdings in any reopening auctions and/or the secondary market. In my view, the negative yield on the 5-year and 10-year TIP is a reasonable price to pay against any unexpected, longer-lasting high inflation as we last saw in the 1970’s. I also do not believe that, unlike Paul Volcker then, the current Fed officials will raise interest rates above the rate of inflation due to the huge government debts outstanding that need to be refinanced and risk of causing the economy to go into a recession. In other words, coupons and interest rates on newly issued conventional 5, 10, and 30 year bonds going forward will be below the rate of inflation; hence the conventional bonds will be real yield negative going forward. Thus, the newly issued TIPs in 2022 will be a good hedge against that scenario. What do you think?

          • Michael Wang says:

            Hello, David!
            The government has published April and May daily CPI-U numbers for outstanding TIPs already. These daily CPI-U and inflation factors numbers are apparently used to price accrued inflation for trading TIPs in the secondary market and upcoming TIP auctions. My question is May is not here yet. How can the government know in advance what CPI-U are in May? Does the government use some sort of forward CPI-U guidance to forecast May CPI-U? Thanks.

            • Tipswatch says:

              @michaelwang The monthly non-seasonally adjusted number is applied to TIPS balances two months in the future. So the recently released March inflation number has already set TIPS inflation ratios for May.

              • Michael Wang says:

                Thanks, David! Do you have any information on how much of the TIPS issued in 2020-2021 were actually bought by the Federal Reserves’ QE program?

              • Tipswatch says:

                On March 10, right at the end of QE, the Fed had $388 billion of TIPS on its balance sheet.

              • Michael Wang says:

                Thanks David, for the information. Wow, if it is true that on March 10, right at the end of QE, the Fed had $388 billion of TIPS on its balance sheet, is it fair to assume that the Fed bought most of the TIPs issued in 2020 and 2021? Another question, for upcoming 5/19/2022 reopening auction of the 10-year TIP due 1/15/2032, what will be the settlement date? Will it be 5/20/2022 or some date after that? Thank you and have a nice weekend.
                I plan to participate in that reopening auction.

              • Tipswatch says:

                I recall reading earlier this year that the Federal Reserve held about 25% of all un-matured TIPS, so it didn’t buy them all. (Can’t find a source for that now, however.) TIPS are lightly traded on the secondary market, so the Fed has had a huge influence in lowering real yields. The settlement date for the May 19 TIPS auction should be Friday, May 27, since the following Monday is a federal holiday.

                FYI, for future questions, start a completely new comment, not a reply. The system can only handle a certain number of responses to responses and then the comments will not post.

  10. Is there any advantage (or disadvantage) to purchasing TIPS via a bond fund, i.e. Vanguard VAIPX fund?

    • Tipswatch says:

      I own two TIPS funds in a traditional IRA: Schwab’s SCHP ETF (total TIPS market, similar to VAIPX) and Vanguard’s VTIP (0-5 year TIPS). I’d prefer to own individual TIPS, but in the last two years I didn’t find many auction issues that were appealing, so I just bought into the TIPS funds. Gradually, as yields improve, I am moving money out of SCHP and into individual TIPS, which I hold to maturity and don’t ‘mark to market.’

      TIPS funds can be volatile, both up and down. For example, SCHP has a total return of -5.02% year to date, but that follows total returns of 10.8% in 2019 and 5.9% in 2021. Real yields are now rising and in my opinion there is still a downside risk of 5 to 10%. VIAPX had a total return of -8.8% in 2013, another year of anticipated Fed tightening. If you can handle the downside risk, these funds are a easy way to invest in TIPS. I prefer individual TIPS because I can hold them to maturity and at least pretend there is no volatility.

  11. Joseph Howard DiMatteo says:

    Hi David, I came upon your site researching TIPS. What are your thoughts on TIP ETF’s like SPIP instead of investing directly through the auction process?
    Thanks and Ciao

    • Tipswatch says:

      Hello Joseph, while I prefer buying individual TIPS, I do own Schwab’s TIPS fund, SCHP, and Vanguard’s short-term TIPS fund (VTIP) in a traditional IRA. I’m weighted about 65/35 toward VTIP because of its shorter duration. TIPS funds can go down in value, even very quickly, as we have seen this year. But that risk is about the same for most Treasury bond funds. When you buy a TIPS at auction and hold it to maturity, you can ignore the current market value and just wait for it to mature.

      • Joseph Howard DiMatteo says:

        Hi David, Thanks for your reply given you are on vacation…in a spectacular place I might add:) Anyhow, I apologize for my ignorance given my newness to TIPS but I do not understand what their yield is if you buy them direct. The most recent TIP auction was for 10 year gives a -0.589% High Yield and a 0.125% Interest Rate. VTIP is yielding 5.5% annually and SCHP is yielding 5.0% which is easy to understand, while fully recognizing the underlying share price can and will vary. What is the expected yield/year of the 10 year TIP bought at auction mentioned above if held to maturity? I wish I was in Sicily to discuss this with you over a latte and a biscotti!

        • Tipswatch says:

          The TIPS funds are losing value, but part of that is offset by inflation accruals, which are high right now. For example, the TIP ETF has a total year to date return of -4.75%. That 10-year individual TIPS will have a total return that lags official US inflation by 0.589% a year over its entire term. So if inflation averages 4%, it will have an annual nominal return of about 3.41%.

  12. lil mule pepe says:

    Correction: “below-mentioned”

  13. lil mule pepe says:

    FYI: Additional transactions vis-a-vis my above-mentioned ($250K) TIPS purchase:

    1099-INT dated 4/15/2021 … $157.93
    1099-INT dated 10/15/2021 … $164.55
    1099OID for period of 12/31/2020 thru 12/31/2021 … $15,542.50

  14. lil mule pepe says:

    In December of 2020 I purchased $250K of TIPS bonds through the treasurydirect website (91282CAQ4=cusip).

    Pursuant to this transaction the Treasury snatched $272,244.05 out of a regular checking account (Chase) held jointly by my spouse and myself.

    My question, regarding the $22,244.05, is if/when/where/how this amount should be reported on a tax return we file with the IRS. (Note: We reside TX and aren’t required to file a state return.)

    • Tipswatch says:

      If I am reading this right, you bought the TIPS in December 2020 and paid $22,244 more than your purchase order. That auction for a 5-year TIPS had a premium price of about $108.87 for about $100.37 of value, after accrued inflation and interest was added in. There shouldn’t be any tax reporting needed for the purchase, because you haven’t sold the TIPS. However, on your 2021 return, as you note, you will owe federal income taxes on the interest earned (around $320) and the adjustments for inflation in 2021, which totaled $15,542. Those taxes have nothing to do with the purchase price.

      When the I Bond matures in October 2025, it’s possible you could end up having a capital loss, if the value doesn’t reach your purchase price of $272,244. (I am not a tax expert.) Right now that TIPS is worth about $268,500, so it looks unlikely that you will have a capital loss.

      • lil mule pepe says:

        Many thanks, David. That’s some very helpful info.

        I’m planning on holding onto my TIPS until maturity and I’m now projecting that my inflation adjustments will run, on average, around $10K/year.

        If said projection turned out to be exactly correct, would my total payoff be $300K (i.e., the $250K face value of the TIPS plus the said $50K in total inflation adjustments)?

        If yes, then (after deducting my going-in cost of $272,244) I’m thinking I would be enjoying a total taxable gain of $27,756. Nice, but lower that what I was initially expecting.

    • Tipswatch says:

      The inflation adjustments you earn on a TIPS are taxable in the year you earn them, so you will be paying taxes at regular income tax rates each year on the accruals (and also on the coupon rate). If you bought this through a brokerage, it should have provided you with the 2021 tax info. If you bought it at TreasuryDirect, you need to log in to TD to find your 2021 tax forms. You will have a 1099-INT and 1099-OID for the inflation accruals.

  15. Kumar says:

    Hello Mr. Enna: Your website is full of useful information; thank you. I am interested in investing in TIPS using my IRA money. Since TreasuryDirect does not open an IRA account, that route is not relevant for me. I must therefore use a broker. I am interested in buying TIPS (including in treasury auctions), holding them, and perhaps selling them later in the secondary market. I have looked only at Schwab, and Interactive Brokers. Interactive Brokers is not relevant for me because it does not allow a customer to participate in treasury auctions, but Schwab does allow it. I suppose that there are many brokers who provide the service that will meet my needs, including competitive pricing in the secondary market, and customer convenience. If possible, please share your observations on the brokers whom you consider the better ones for these specific purposes. Thank you,

    • Tipswatch says:

      Although there many be many other good brokers for purchasing TIPS at auction, I know that Vanguard and Fidelity will let you make the purchase with zero commission. I’d expect Schwab does the same. All three of these firms are good, solid and trustworthy.

  16. Chantale HETU says:

    I am a Canadian Citizen residing in Canada. How can I buy I Savings Bonds through a local Financial institutions (banks) in Canada? Is it possible to buy I Bonds ($5000 US) by mail? To a US TReasury direct address to be specified in the USA.

  17. hoyawildcat says:

    Hi David,

    Is there any requirement that I redeem my oldest Series I bonds first (FIFO)? Put another way, can I redeem my youngest bonds first (LIFO), which will have less accumulated interest and will therefore have a smaller income tax hit?

    I checked TreasuryDirect but couldn’t find an answer.

    Regards, Bill

  18. Steve says:

    David,

    Please expand upon your comment:

    The reason is: The risk of inflation is lurking. If it strikes, and I think it will, your regular bond investments (especially in mutual funds) are going to take a big hit. TIPS mutual funds will also be hit — be sure of that.

    With my 401(k) I cannot purchase TIPS directly so I own the Vanguard TIPS Fund (VAIPX). As you note interest rates have been rising over this last week and VAIPX has taken a hit.

    Are you suggesting that funds such as VAIPX are not effective as inflation hedges?

    • Tipswatch says:

      Hi Steve, I wrote this Q&A nearly a decade ago, during an earlier surge in TIPS prices (and negative yields) caused by Federal Reserve bond-buying programs. As it happened, the value of TIPS mutual funds did plummet … in 2013 the TIP ETF went from $122.55 on April 22, 2013 to $109.60 on Sept. 3, 2013. That was a big hit, but now the TIP ETF is much higher, closing at $125.91 on Friday. Here are some things go keep in mind:

      1) If interest rates start rising — nominal and real yields are likely to move mostly in lockstep — the value of TIP mutual funds will decline. VAIPX has a duration of 7.4 years, so its value should fall by 7.4% if real yields rise by 1%. (This is true of all bond funds, and VAIPX is a good fund, in my opinion.)

      2) If inflation starts rising, the value of an investment in VAIPX will also rise with the rate of inflation. So that will partially counter-balance the effect of the drop in asset value because of rising inflation.

      3) And if interest rates rise, you’ll be getting a higher relative payout from VAIPX, which should balance out over 7.4 years.

      Is VAIPX an effective inflation hedge? Yes, but realize that its current pricing is based on a negative real yield of about -1.5%. So if current interest rates stay steady, an investment in VAIPX will lag inflation, most likely. So will just about all bond funds of any kind.

      I’ve always been lukewarm toward TIPS mutual funds, but I have to admit they work really well in a retirement account with almost zero hassle.

  19. Ross Dawne says:

    David:

    I read through your interesting questions and answers. There were questions about whether a TIP could drop below $100 (i.e. deflationary periods). The gist of your answer was that it could not go negative below $100 which I agree with generally. However, I would have pointed out that if someone purchases a TIP in the secondary market then negative return below purchase price is possible. For example imagine (a) a TIP with a face amount of $100, (b) for simplicity, it was purchased for exactly $100 on its issue date (i.e. no premium or discount). (c) now, 5 years later it has accumulated $15 of additional principal through inflation so the nominal principal amount upon which the coupon is not calculated is $115, (d) again, for simplicity assume that the coupon still is equal to market yield to maturity (i.e. still no premium or discount because of yield to coupon differences). The price for a purchaser purchasing such a bond would be $115. If there was deflation in the remaining years after the secondary purchase that nominal principal amount could be ground down by up to $15 back down to $100. To me this is a great reason to buy brand new bonds rather than in the secondary market. Also, I assume that any ETF for TIPs would be 99% filled with TIPS that already have inflation principal accrued (that could be lost in a subsequent deflationary cycle). Do you agree?

  20. Ross Dawne says:

    David:

    I assume that everyone in a TIPS auction pays the same price (i.e. they don’t pick off the higher bidders down through the lower bidders until they fill the offering). The reason I ask is that I am unable to invest through TreasuryDirect (no U.S. address). Therefore, I must purchase through a broker after the auction. I want to arrange the purchase after the auction closes but before the TIPS are issued (for example in the week before 10 day period before July 31, 2018 in the upcoming auction). I want to know that auction price announced by the Treasury is my broker’s cost and then I can figure out what “fee” they are adding on to do the trade for me (assuming no major fluctuations in market rates between auction result and issue date).

  21. Gordon Pedersen says:

    Hello, I just discovered Tipswatch.com, Thanks for sharing your insights. Are you aware that SeekingAlpha is imposing a paywall on archived articles? I am unsure, but the paywall may apply to articles less than a month old.

    • tipswatch says:

      Hello Gordon, I am not aware of that. I used an alternate browser and looked at the site without logging in, and I was able to view articles from more than a year ago. Is this an issue on the phone or tablet? — You can also try creating a free account at SeekingAlpha and subscribing to my feed on this page: https://seekingalpha.com/author/tipswatch/articles#regular_articles

      • Gordon says:

        What I read on S.A., and which matches my own experience, is that they are rolling out the paywall over time. Of course, I can’t know their intentions. I can verify I’m not the only one to be confronted with loss of free access to older articles and threads. HTH.

        • tipswatch says:

          Gordon, this appears to be something SeekingAlpha is rolling out, and things may still be changing. They are drastically tweaking the pay model for authors. Some of my stories have good shelf life and get read for months. This will cut off some of those page views. From what I can see, most of my articles will remain open for a year. Some of the ‘Editor Choice’ articles get placed under the paywall earlier. Can you read this article: https://seekingalpha.com/article/4095773-anyone-buy-inflation-protected-investments ….. If you can’t you can also try using an incognito browser setting, which might let you slip under the paywall. (Make sure to subscribe to my articles if you using the free version of SeekingAlpha, that might help, too.)

  22. Robert says:

    What types of changes do you see the US Treasury implementing in TIPS marketing and TIPS securities over the next few years. Although TIPS have apparently saved taxpayers money compared to regular treasury securities, the market for TIPS seem more limited in the US.

    • tipswatch says:

      So it’s possible the Treasury is disappointed that TIPS haven’t become a more mainstream investment. As you noted, the Treasury recently reported it has saved billions of dollars over the last 15 years because inflation ended up running below the inflation breakeven rate. The primary investors in TIPS are foreign banks and big investment entities. With inflation so low, the offerings have been getting smaller. I doubt we will see any changes in the near term, and if inflation picks up, investor interest will also climb. (And the Treasury could end up losing money on TIPS.)

  23. Ed says:

    Hi David,
    Any foreign country TIPS one might consider? Switzerland …?

  24. Halfdave says:

    good site, question, have you looked at the iShares TIP? is there a closed end fund that gives juice to the basic TIP?

  25. tipswatch says:

    Dan T, you can just look at the closing prices of all TIPS trading on the secondary market:
    http://online.wsj.com/mdc/public/page/2_3020-tips.html?mod=topnav_2_3021
    The yield shown there was the closing yield to maturity for the day shown. That is a ‘real yield,’ meaning the yield above inflation. Whatever inflation is, the TIPS will return that ‘real yield’ above inflation.

  26. Dan T says:

    If I expect inflation to be greater than the market anticipates, wouldnt it be an advantage to buy a previous issued tip with a higher coupon rate than the current issues? If I understand it correctly, I will not only have my principal increase with inflation, but the higher coupon rate will also give me more every coupon date than a lower coupon rate? I am considering buying 30 year tips and I like the 1.375 coupon compared to the recent issued 1% coupon in February.
    Does my thinking make sense, if inflation does turn out to be higher in the future than the market anticipates?

    Thank you for any insight you may have on this topic.

    • tipswatch says:

      Dan T, you will pay a higher price upfront for that higher coupon, right now it is about 7% above par value, creating a yield to maturity of 1.07%, slightly better than the 1.03% currently on the 30 year issued this year. If you like the 28 year maturity instead of 30 year, that would be a reason to buy the 28 year. Otherwise, they will perform very similarly.

      • Dan T says:

        Thank you for your kind reply.
        Do you happen to know if there is a yield to maturity calculator for Tips on the net?
        I have found quite a few for fixed, but none that would work for tips and has an inflation input similar to this one for fixed bonds, https://powertools.fidelity.com/fixedincome/yield.do

        Of course I realize that an inflation input would be just a guess but it would allow a projected result based on different scenarios. This would allow me to compute just how significant the different coupon rates and various inflation rates would affect yield to maturity
        thanks Dan

  27. Jake says:

    I am new to TIPS and I really appreciate all the information on your site (it is the best place I’ve found for real information on TIPS). As part of my education I’ve started looking at different TIPS for sale on the secondary market. I’ve found a listing that seems too good to be true, so I must be missing something. Would someone examine this and tell me what I’m not seeing?

    Vanguard has CUSIP 912828et3 listed with an asking price of $99.890. According to their data the Yield to Worst is 2.281% with a modified duration of 0.385. The TIPS matures 1/15/2015, has a coupon of 2%, a Factor of 1.2014, and price as Issue was $99.72283

    Now, here is where I’m sure my calculations are wrong….
    1) If the factor is 1.2014, then the current bond value is $120.14.
    2) 2% of $120.14 is $2.4028 * the duration = $0.925 in interest.
    3) Assuming the Factor stays at 1.2014 at Maturity you would be paid $120.14 in principal for the bond.
    4) Assuming a purchase price of $99.890, that would mean a gain of $20.25 in principle and $0.925 in interest (a total gain of $21.175 or 21.1%).

    I was originally thinking the YTW of 2.281% was too good to be true (with a 0.385 duration a real Yield of 0.88% for roughly 4 months). However, after doing the calculations I’ve come to the conclusion I clearly don’t understand how TIPS work. I must have something very wrong.

    If someone can follow my logic above and show me the error of my ways I would greatly appreciate it.

    • tipswatch says:

      Yields on very-short term TIPS get wacky, possibly because they are condensing a few months of yield into an annualized number. Also, this TIPS has just one bi-annual interest payment remaining, on Jan. 15, 2016. So the coupon is actually 1%, not 2%, since only one payment remains. Still, that could be an excellent investment. But I imagine that trading in this TIPS is extremely thin.

      On the price … If you want to buy $1,000 of par value for this TIPS you will actually pay $1,201.40, not $1,000, because you are buying the accrued principal. Even if you buy it at a slight discount, you’ll end up earning about 1%, not 20%. But that is still a nice gain, if the numbers work out.

      And then the other risk — and possible explanation for the yield — is that falling gas prices will cause deflationary CPI numbers over the last few months of this year. That will reduce your $1,201.40 investment by the amount of the deflation. You are guaranteed to get only $1,000 at maturity. Your 1% could disappear.

      Like I said, I am mystified by these short-term yields, though. Maybe others have some explanations.

      • Jake says:

        Tipswatch, thank you for your reply… It opened my eyes (at least a little). You are absolutely correct that we would be paying for the accrued principal! That was one thing I missed. With normal bonds there isn’t accrued principal, only accrued interest, so that was one thing I missed.

        Another words, when the price is listed as $99.890, that isn’t the real price you will be paying. We have to multiply the asking price by the factor to get the real purchase price (in this case $120.007846).

        Then the interest payment would be a partial payment (interest multiplied by the duration), so $0.925 in interest.

        That means if the factor stayed the same the return would be .77% (real return, not yearly return). This would be a good return for a few months. However, like you said, whoever is on the other side of this trade is betting that the factor will decrease and wipe out this return. It’s interesting because there are a lot of these for sale (this CUSIP has 5,000 for sale, and there are other similar short term setups just like this for sale). Clearly, someone thinks this is a good trade. Since I’m not a trader I’m staying away from this, but it was interesting to explore it and hopefully learn something.

        Thanks for the education…

  28. Frank says:

    If I want to have $30,000 in a TIPS that has a 1.1 inflation factor is it accurate to assume that I can purchase about $27,300 of this TIPS? My risk being that if deflation sets in, the value could go back to $27,300 at maturity whereas if I had bought $30,000, the value would still be $30,000.

    What are your thoughts on building a 30 year TIPS ladder by buying a TIPS for each year 1-10 and buying one 10 year TIPS to cover years 11-30? When that TIPS matures, it would be used to purchase a TIPS for each year of the the next 10 years plus one to cover years 21-30. Understand about reinvestment risk but seems this might keep things a bit safer/simpler/more flexible particularly if I depart this realm prematurely. I am 67 and these funds would cover my annual spending gap after social security. Interest income is not my goal but rather inflation protected return of principal…wish TIPS STRIPS were available.

    Thanks
    Frank

    • tipswatch says:

      Frank, if you are buying on the secondary market, the price you pay will be determined by the current yield to maturity (which sets the cost per $100) and the accrued principal. If the cost is $100 for $100 of par value, then you would actually be paying $110 for $100 of par value, plus $10 of accrued principal. So if you wanted accrued principal of $30,000 you would buy about $27,273 of par value. And you are right, your deflation protection only covers the par value, not the accrued principal.

      Not sure what you mean on the TIPS ladder. For my ladder, the 10-year TIPS is the basic investment, but I only buy at original auctions. I have two 30-year TIPS holding up the high end. I generally buy one 10-year TIPS a year, and if I skip a year I use a 5-year to fill the hole in the ladder. I keep rolling over the 10 years. Reinvestment risk is an issue — we had a severe case of it from 2011 to 2014. I hope things will be getting better in future years.

  29. rajeevba says:

    Thanks, I had seen this list, had just assumed that owners of TIPs from the I missing years had just not put their bonds up for sale. So they just don’t exist!! I guess I’ll have to buy non TIPS bonds for those other years (for my ladder)…

  30. tipswatch says:

    Rajeev, because the Treasury stopped issuing 30-year TIPS between October 2001 and February 2010, there are many gaps in the TIPS ladder. Another problem is that Treasury no longer issues 20-year TIPS. So there are only six TIPS that mature after 2029, ranging in years from 2032 to 2044. This Wall Street Journal list shows all the maturities:

    http://online.wsj.com/mdc/public/page/2_3020-tips.html?mod=topnav_2_3021

  31. Rajeev Batra says:

    Hullo TipsWatchers, I have a question re secondary market purchases. It seems like the TIPS available to buy on the secondary market are for very few years (I cannot find, as of Nov14, TIPS for sale for the years 2032 through 2039). Any advice on how to find/buy them?

  32. Mark Williams says:

    I am waiting for interest rates to rise before investing in TIPS. In your opinion – is it likely that there will be a rush to purchase TIPS when this occurs, and the yield to maturity will increase, stay the same, or decrease from today’s near-zero amount?

    Thank you for your column.

    TIPS-waiter

  33. Pingback: How can I tell if I am going to pay a premium or discount at a TIPS auction? | Treasury Inflation-Protected Securities

  34. Pingback: Who should buy Treasury Inflation-Protected Securities? | Treasury Inflation-Protected Securities

  35. slizzle says:

    Appreciate the site. Since you advocate buy-and-hold through Treasury Direct I am wondering if you would care to post about some issues this brings up. 1) Tax efficiency. Many would argue that TIPS are tax-inefficient when not held inside a tax-advantaged instrument. How much of a disadvantage does this bring you using your strategy? How less attractive are TIPS when held in this way? 2) Laddering. Buy-and-hold to maturity through treasury direct involves constructing a careful ladder and I’m wondering if you have any insights about how you’ve done that with TIPS

  36. tipswatch says:

    Sliffle, great questions. I added answers to these at the bottom of the ‘Why Tips’ post.

  37. sliffle says:

    I have a couple questions for which I have not readily found answers online:

    1. If I place a noncompetetive bid for say $1000, do I need to pay more than $1000 if the auction ends above par? Or will my purchase price still be $1000 but with a reduced yield?

    2. How often does the value of the principal get updated in TreasuryDirect to reflect the CPI?

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