David Enna, Tipswatch.com (updated Dec. 31, 2022)
Today, as I update this Q&A in December 2022, TIPS are surging in popularity, paying a yield to maturity that’s close to or above 1.60% for the entire maturity spectrum. This follows more than a decade of very low real yields, and often negative real yields. At the same time, TIPS mutual funds have been hit hard in 2022 because of those rising real yields.
My premise is to buy and hold TIPS 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 for most people TIPS, I Bonds, T-bills 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.
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, 2014, the Treasury reissued this same TIPS, which still had 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%.
The pricing of TIPS at auction seems very confusing. What are the key components that determine what an investor pays?
The key components are the high yield, coupon rate, adjusted price, inflation index at the settlement date, plus accrued interest. That’s a lot to grasp. So I wrote a walk-through on the pricing process.
I have noticed that quoted real yields for very short-term TIPS can sometimes vary greatly from the overall market yield. Why does that happen?
The real yield you see quoted on the secondary market can get highly exaggerated as a TIPS enters into its final months to maturity, with the annualized rate becoming much higher or lower than the rest of the market. This often reflects investor sentiment about inflation in the immediate future, just a few months. Keep in mind that the market probably is pricing the TIPS correctly. I wrote an explainer.
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 a TIPS 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 negative-yielding 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) two months earlier. But since the Treasury only pays interest twice a year, the compounding 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 0.625% 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%:
In 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.
Treasury Inflation-Protected Securities 
I bought a TIPS ladder with your help this year – 2026-2032. The purpose is for paying for kids’ college (in addition to 529).
I see they have all risen – especially the longer dated ones – due to rates dropping.
While I bought these intending to hold to maturity, at what point is it wiser to sell and invest in something else? The 2032 is up 4% in a few months. If I hold to maturity I “just” get the YTM at purchase (around 1.25%) plus inflation regardless of current rate fluctuations as I understand it.
Thanks.
This is a personal decision and depends on your other investment options. If you think inflation will continue to be a threat, then hold the TIPS to maturity. If you think inflation will wither away, then buy nominal investments like bank CDs or Treasury notes. It is correct that after you buy a TIPS you earn coupon rate + inflation accruals until maturity (which removes market price as a factor).
David, love this website and your Twitter feed. My wife and I are fortunate to be looking at a retirement soon with a fairly large pension program, but it doesn’t adjust to inflation, so we’ve seen the 1.5%+ long-term TIPS as a fantastic opportunity to help use some of our asset allocation to hedge against the risk of higher-than-expected inflation that could significantly erode those monthly pension earnings.
One question I had that I don’t think you’ve covered (and might be worth it’s own post)is why it seems like the “curve” for secondary TIPS has outliers, and appears inefficient.
For example, here are 3 bond YTMs maturing within a year that appear to be inefficient from a yield curve standpoint (from Vanguard):
1/15/28 (1.766) [coupon 1.750]
4/15/28 (1.790) [coupon 0.500]
7/15/28 (1.656!) [coupon 0.750]
1/15/29 (1.707) [coupon 2.500 ; 912810PZ5]
1/15/29 (1.681) [coupon 0.875 ; 9128285W6]
So…how can the 7/15/28 particularly be priced efficiently, when I’d think any buyer in their right mind would take the extra yield on the 4/15/28 or 1/15/29 bonds?
Also, why would the highest YTM (1.725) be in the 2/15/47 maturity? For 2/15//50 it drops all the way to 1.662! There’s no way anyone has some magic black box to have a model that says inflation expectations will change between 2047 and 2050 specifically, and the coupons are the same. I’m too lazy to do the math, but it appears even if you wanted a 2050 maturity, you’d still be better taking the 2047 extra gains which would likely offset buying a 3 year Treasury in 2047.
I don’t think TIPS are heavily traded on the secondary market, at least compared to more-traditional nominal Treasurys. So there could be some anomalies, but almost all the time the prices are logical. I did explain some of the factors in this article: https://tipswatch.com/2023/02/05/tips-on-the-secondary-market-things-to-consider/ . A TIPS with a very large inflation accrual (triggering a high cost above par) and/or a very high coupon rate (triggering an even higher premium price) will tend to get a higher market yield, because it is less desirable.
My article actually compares those two Jan 2029 issues. One has a low coupon rate (0.875) and an inflation accrual of about 17%. The other one has a high coupon rate (2.5) and a higher inflation accrual of 38%. So investors are demanding a higher real yield for the one with the higher accrual and higher coupon rate.
That July 15 2028 issue has a low coupon rate and an inflation accrual of 18%. And notice that its yield is quite close to the Jan 15 2029 issue with similar statistics.
Good afternoon,
I recently read the article (per your recommendation) by Mr. Roth about building a TIPS ladder. It was well done.
I have a question about a statement he makes about creating a TIPS ladder in a retirement account. He states that creating a TIPS ladder in a retirment account will elimante the state income tax exemption (and implies that the federal income tax exemption is retained). Why does the state income tax exemption get eliminated if a TIPS ladder is created in a retirement account?
Thanks
If it is a traditional IRA account, all proceeds are taxable after withdrawal. Doesn’t matter if it is a Treasury. If it is a Roth, no taxes on withdrawal.
From the tax perspective, would TIPS in a Roth account be better than the Traditional IRA since all earnings will be taxed in both federal and state returns? Thanks
The issue then becomes whether TIPS in the Roth beats other things that might be placed in it for your asset allocation.
My Roth account is 100% in stocks, which is the usual advice, because it will be the last money spent and can grow the longest. But lots of people have individual TIPS in a Roth account.
The reason I prefer to put any kind of bond into a Roth is that because if its outside the Roth you will pay ordinary income tax rates, on the interest. If the stocks are outside the Roth then you only pay capital gains taxes, and those stocks that are losers can be offset against any gains. It’s true that you aren’t going to pay taxes on the stocks in the Roth, but the stocks already have an advantage being held outside of the Roth.
Laddered 5-year TIPS/5-year bonds for traditional IRAs, which means selling one’s stocks monthly and methodically over time and putting the proceeds into TIPS/5-year bonds, so that it devolves to 0% stocks and 100% bonds/cash at some point before one’s death, since the IRS expects us to spend all of it and will penalize us if we don’t.
For Roths be 90% invested. With one’s extra cash, I would suggest creating ladder of a 13-week Treasuries, at least as long as the yield curve remains inverted…. Roth cash is useful for emergencies, so keep it handy.
Can the principal on TIPS go below the par value for interest payment calculation purposes? I understand that at maturity, one gets the maximum of par value and inflation adjusted value. So never less than $100
Let’s say I buy TIPS having a coupon rate of 0.625% and a face value of $100. Then for whatever reason we are in continuous deflationary environment (And therefore less than 1.00 in terms of “index”), will I get $0.625 in interest or less than that?
Yes, the principal value can go below par in the calculation for the coupon rate payment. This will happen this month with the 10-year TIPS auction. The inflation index is going to be less than 1.0 because of -0.1% inflation in November. There will still be accrued interest, but a tiny bit amount less than the expected amount.
Thank you so much the reply. I really appreciate it.
As a general rule, does it make sense to assume that the higher the real yield the lower the inflation breakeven?
As an extension to that question, is there is a magic number for real yield beyond which it will be no brainer to simply buy the respective TIPS?
As I think more about what I asked, I want to say that is not how some one should look at the inflation breakeven. The reason I say that is because buying TIPS is essentially locking in Real Rate as well as a Nominal Rate. Because in-theory the difference between them is the expected inflation rate for the duration of the security (5, 10 or 30) at THAT point in time.
So as we move forward in time:
1) If the inflation remains BELOW the inflation number that was observed at the time when the TIPS were bought then it would have been better to buy a nominal treasury.
2) If the inflation remains ABOVE the inflation number that was observed at the time when TIPS were bought then it would have been a profitable decision.
3) If the inflation remains the SAME as the inflation number that was observed at the time when TIPS were bought then it would have made no difference as to what was bought.
Very sorry for multiple posts.
I agree with your points 1, 2 and 3 … but of course there is no way to predict what will happen. So maybe mix some nominal Treasurys or bank CDs with TIPS? There is no way to predict future inflation. With a TIPS you know your real return. With a regular Treasury, you know your nominal return.
Thank you! I cannot thank you enough! Your help is hugely appreciated.
Real yields and nominal yields tend to track together, and the difference creates the breakeven rate. When nominal yields rise and real yields fall, the breakeven rate gets larger and in theory TIPS are less attractive versus a nominal Treasury of the same term. When nominal yields fall and real yields rise, the breakeven rate gets smaller and then TIPS are “relatively” more attractive.
Based on the last 15 years or so, real yields higher than 1.5% for TIPS of any term are attractive, but rarely seen. Twenty years ago, real yields of 2% or higher were fairly common. At this point, real yields are in a 1.2% to 1.35% range, still attractive but down from a month ago.
I like the combination approach in the sense that have a mix of nominal and real yielding instruments. I am a huge fan of Treasuries so I am more inclined to tbills/notes and TIPS combination.
In the case of a retired investor with a nest egg large enough to cover all needs in the future who may find inflation protection his or her only goal, an all Tips portfolio may be desirable even if the real yield was zero.
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David, I’m back reading your explanations and the treasuries, but I still haven’t understood the interest part of TIPS. I get that the interest is paid on the principle,which is adjusted up or down depending on inflation, and I get that interest is paid every 6 months. But I remain unsure of where that fits into what you are paid when you hold to maturity. The treasury site says you will never get less than the principle…but where does the interest fit into that? Is the interest held and calculated separately? Is it possible for deflation to take out all your interest payments? In a normal bank, interest is added to the total, and the next interest payment calculated from that. Since it is always rising there is no confusion. But the treasury hasn’t said where I’ve been reading, how they calculate. Is the inflation/deflation applied before or after the interest calculation? If deflation is 2% every year and your coupon only 1%, do you end up with the face value only or the face value plus some interest?
What is guaranteed at maturity is the par value you originally purchased. If you bought $10,000 par value of a TIPS, you might have paid more or less than $10,000, but $10,000 is guaranteed to be paid at maturity. The discount or premium you pay will depend on how the real yield to maturity compares with the coupon rate of the TIPS. If the real yield is higher than the coupon rate, you get the TIPS at a discount. If it is below the coupon rate, you buy the TIPS at a premium.
The principal balance is ALWAYS par value x inflation index, nothing more. The inflation index changes every day, based on tables the Treasury creates from inflation two months earlier. The coupon interest rate stays the same, but the coupon payment each six months will depend on the principal balance. If you have $10,100 of principal and the coupon rate is 1%, you will get $50.50 at that bi-annual coupon payment. So the coupon payments will vary with the principal balance, which moves up or down with inflation. The coupon payment is paid out immediately and is not added to the principal. The coupon payment could go down if the principal value has gone down in the six months slnce the last payment. But could it go to zero? No.
The principal grows ONLY with increases in the inflation index. Don’t confuse this with a bank CD. The coupon interest is paid out immediately twice a year. The principal will always be par value x inflation index. Inflation indexes are expressed as a number like this: 1.29494, and are updated daily. If you had $10,000 in par value of that TIPS, your principal would be $12,949.40.
At maturity you get paid principal value x the final inflation index, plus you get one final coupon payment.
Thank you David! I didn’t realize the interest was paid out immediately, so now it makes sense. Thank you so much for taking time to answer my question!
If for example in the secondary Tips market if the price was 96 and the inflation factor was 1.25, the cost would be greater than the original par value, leaving the investor at risk for loss due to deflation even if held to maturity?
Only par is guaranteed to be returned at maturity. So in this case $1,000 par of that TIPS would cost about $1,200, and that extra $200 is not guaranteed to be returned at maturity. But you are getting $1,250 of principal at a discount. Paying 20% above par for a TIPS is a little more risky than buying a TIPS near par, and usually those TIPS have a higher yield on the secondary market.
Hi,
I am making a comparition between I Bonds versus 5 and 10 Year TIPS, in todays’ interest rate environment. The calculated inflation rate for both are the same. We know the I Bond fix rate is 0.4% versus the 1.5% plus (hopefully) for the remaining part of the year (with NO Premium hopefully)
Lets analyze: Hold I Bonds for 5 years and 5 year TIPS till maturity. I think in todays’ market 5 year TIPS is the winner atleast by 1.1% plus (if there is no deflation in next 5 years)
Lets analyze: Hold I Bonds for 10 years and 10 year TIPS till maturity. I think in todays’ market 10 year TIPS is the winner atleast by 1.1% plus (if there is no deflation in the next 10 years)
The probability of deflation occuring in next 10 years is double versus in next 5 years.
Wouldn’t it be a good idea for me to buy 5 Years and 10 Years TIPS being offered in Nov/Dec 2022, rather than buying I Bonds (if no deflation)?
I am still a fan of i Bonds, but I agree 5- to 10-year TIPS are now more attractive for people committed to hold to maturity.
Hi,
I purchased 5 year TIPS from Treasury Direct 0n 10/31/2022. Please note the “Price per $100” of $99.493344. Today, I check the the price at Fidelity.com the ask price is $99.180
In 3 days the loss is 0.31%. Is it because of the FED increasing the rate on 11/02/2022?
OR
Is it normal for the TIPS to be sold a lower price after the settlement date?
OR
Is it that at the time of settlement (at Treasury Direct) the “Inflation-Adjusted Value” is zero; whereas at Fidelity.com the “Inflation Factor 1.00002”
Thank you
CUSIP #: 91282CFR7
Security Type: 5-Year TIPS
Inflation-Adjusted Value: Not available
Price per $100: 99.493344
Investment/Interest Rate: 1.625%
From Fidelity: As of 11/03/2022 04:59 PM
91282CFR7 UNITED STATES TREAS NTS SER AE-2027 1.62500% 10/15/2027
Bid Ask
Price 98.915 Price 99.180
Qty(min) 5,000(150) Qty(min) 5,000(10)
Yield / Type 1.855 / M Yield / Type 1.799 / M
Adjusted Bid Price 98.917 Adjusted Ask Price 99.182
Inflation Factor 1.00002
Why would the price decline? Because the current real yield (about 1.82%) is higher than the auctioned real yield (1.732%). Yield up, price down. The price is going to vary every single day. The inflation index is not a factor. The Fed could be a factor, since it influences the direction of rates. But this is not worth focusing on unless you are planning to trade this TIPS.
Question for 91282CEZ0 (From Fidelity)
Basic Analytics
Price (Bid) 90.595
Price (Ask) 90.794
Depth of Book View
Ask Yield to Worst 1.654%
Ask Yield to Maturity 1.654%
Current Yield 0.688%
Inflation Factor 1.01943
Inflation Adjusted Price 92.558127
Third Party Price 90.369
Inflation Adjusted Third party Price 92.129
Spread to Treasuries -2.587
Treasury Benchmark 10 YR.(2.750% 08/15/2032)
Question: I understand that the Bid Price has gone down because of the low “current yeild” of 0.0688% but do not undestand the Inflation Adjusted Price of $92.558127. Note there is no defation after the TIPS issue date. Is Fidelity adjusting the TIP price from Bid Price?
May I know what Spread to Treasury is of -2.587?
Thank you
That spread to Treasuries number looks like the inflation breakeven rate (I’d guess). The inflation adjusted price is higher because you will be buying 1.943% of additional principal, based on the inflation index of this TIPS, 1.01943. Ask price of 90.794 x 1.01943 = 90.558.
does treasury direct update the Accrued principal of TIPS on certain dates during the year? i see this information posted daily on the wall street journal website. i am guessing they get it from treasury direct?
Not sure about this, but it seems to me I remember TD lagging on the principal updates, possibly matching the semi-annual compounding.
Are there any Muni Bond TIPs?
No
In your last answer you indicate that the coupon rate will increase/decrease in increments of 0.125% yet you also say the rate will be 0.650% – which is not an increnent of 0.125%. Is this a typo or am I misunderstanding.
That’s a typo and it is fixed. Thanks for the alert.
Tips inflation indexes are published for all of October and November 2022. How are these determined and published in advance? Hard to understand that.
The inflation indexes are set by the non-seasonal CPI-U index two months earlier. So October’s were set by August inflation, and November’s were set by September inflation.
Hi,
Treasury Direct gives PAR value at the purchase time. Let us assume purchasing new 5 year TIPS being offered this month. If there is a persistent deflation for next 5 years, please answer my following questions.
1. Will Treasury pay the full PAR Value at maturity?
2. For each deflationary year, the value of TIPS will decrease from the PAR Value. Will Treasury issue 1099 or equivalent to show the “Loss” value?
3. Is the loss in value considered as capital loss for the year? (I understand you do not give tax advice)
4. How does one protect him/her self from Treasury asking for premium at the time of non competitive bids?
At the same time one may keep on getting the coupon interest rate, if any.
Thank you
The TIPS being auctioned Oct. 20 will be sold at a slight discount to par value. The reason: The coupon rate will be set slightly below the auctioned real yield, plus this TIPS will have an inflation index slightly below 1.0 on the settlement date. (That’s fairly unusual.) The par value is guaranteed to be returned at maturity. All future inflation accruals are not guaranteed to be returned if deflation sets in for a prolonged time.
TreasuryDirect issues a 1099-OID for tax purposes that will compile all the inflation accruals and the total number is taxable as current income. Any negative accruals will subtract from the total taxable amount. So you would not have a capital loss, you’d just have income to write off against other income. But as you note, I am not a tax expert. (And if you buy in a tax-deferred account, through a brokerage, you can ignore the tax issue.)
If you buy a new-issue TIPS at auction, and the real yield is higher than 0.125%, you are highly likely to pay an unadjusted price that is a slight discount to par. But … the inflation accrual (for the first half month of inflation) can push the adjusted price slightly higher than par. So you are buying a little extra principal, at a slight discount.
This is NOT true when the real yield is deeply negative, as it was for a 5-year TIPS until recently. Then you pay a premium, possibly a lofty premium.
David:
CNBC.com reports real-time yields for the 10 year TIPS that matures 2032-07-15. Here is the link: https://www.cnbc.com/quotes/US10YTIP
However, the “yield prev close” that they report does not match the WSJ quote from the previous close. Do you know why this would be?
Also, the yield reported at the CNBC site changes during non-trading hours. Do TIPS trade after hours?
thanks
Treasurys do continue trading internationally, so CNBC could be quoting a later yield than the Wall Street Journal posts at the end of the day. This morning CNBC has a 10-year TIPS quote updated at 7:54 am.
David:
OK, that makes sense. Do you know of anyplace that reports real-time quotes for the other TIPS maturities?
The Barrons Currents Yields page shows real-time quotes, but only for the latest TIPS issued … https://www.bloomberg.com/markets/rates-bonds/government-bonds/us
Hello David:
I am ready to finish buying the final rungs of my TIPS ladder and the rates seem great. But everyday that I delay, the cost of the ladder declines because yields are climbing so quickly. If I believe the Fed will continue to raise nominal rates through the end of this year, should I wait to buy more TIPS? My worry is that an increase in nominal rates for treasuries may not necessarily result in an increase in TIPS yields. I notice your comment above to Mark that “almost certainly, TIPS yields will rise along with overall rates.” And I can see the logic. If the Fed is raising rates, but expected inflation stays constant, then TIPS yields should go up. But I am a bit nervous waiting because this is market timing, which is not supposed to pay off, on average.
Do you have any advice for me?
It’s impossible to say where rates are heading, so I think having a plan of regular investments probably makes the most sense. At any point, the Fed could drastically change course. Longer-term rates are very hard to predict.
Hi David,
I have been an avid reader of your posts and have most of the non-equity portion of assets in TIPS and I-Bonds. I am confounded by current situation: TIPS yield curve is inverted, which means investors are expecting less inflation in the long term. The breakeven inflation rate for 10 year TIPS, while high, is not as high as it used to before Fed started its hikes, which also points to the same – chances of unexpected inflation in the long term are lower now than a few months back.
Given these, wouldn’t TIPS investors prefer buying short-term maturity TIPS and rolling them over when they mature, resulting in restoration of the yield curve as more demand drives down short-term yield?
Yes, 5 year TIPS are very attractive right now, but it’s also great to lock in a 1.2%+ real yield for 10 years. The risk in rolling over is that real yields with go low or negative again in the future.
Excellent point. Thank you.
It is better to maximize ibonds first (perhaps using the gift box methods to get more more in ibonds) and only use tips if you need more space for other inflation protected bonds?
I’d recommend buying I Bonds up to the max ($10,000 per person) every year, no matter the current composite rate, just in case we hit years like this one in the future. Hold them until you need the money; after 5 years, no penalty. But, when TIPS have positive yields, they are definitely competitive, if a bit more complex.
I-Bonds can only be purchased in taxable (non-IRA) accounts via TreasuryDirect but are a perfect way to protect excess cash against the ravages of inflation. (Yes gift purchases are great too, which allow couples to buy even more I-Bonds as “gifts” at the current high rate and “deliver” them in later years after inflation has abated. TIPS are best for non-taxable IRA accounts (purchased through a brokerage), in which there are no tax complications. However, as has been noted here, it may be best to go 50/50 with TIPs and nominal Treasuries since it’s impossible to predict future inflation.
Love your blog and website. I can make sense out of the 5 year nominal, 5 year inflation adjusted, and 5 year break even Fred charts. The 5 year 5 year forward Fred chart is totally confusing to me. Where can I find information on what I am looking at… what the time axes really means. When I look at a particular date what am I really looking at?
I don’t have a source for the 5 year 5 year forward and I don’t track it. I hear it mentioned on Bloomberg and CNBC sometimes and I assume it is a calculation of inflation expectations for the final 5 years of a 10 years TIPS term. Right now, I am sure a lot of the inflation expectations are loaded into the first 5 years.
After much planning, I purchased a TIPS ladder this last Wednesday. Today, two days later, I checked the Accrued Principle at the Barrons website you mentioned in a prior response. This is the same table as posted in the WSJ. To my surprise the Accrued Principle had not changed. I had thought the CPI adjusted principle was updated daily. Can you tell me what the schedule is for updating the Accrued Principle? Thank you.
This could be because the September inflation accrual is very slightly negative. So the day to day changes might not be significant. At any rate, here are all the inflation indexes for September: https://www.treasurydirect.gov/instit/annceresult/tipscpi/2022/CPI_20220810.pdf
Hi.
In the unlikely event there is deflation and the principal of a TIPS bond is adjusted down, is that downward adjustable deductible against other interest income on a tax return?
Yes, it becomes negative interest and offsets other interest in that year. This is irrelevant in a tax-deferred account. It’s common to have one or two months of deflation but rare to have deflation for a full year. In fact, only one time in the last 50 years, based on years ending in October.
TIPs market prices seem to be quite sensitive to interest rate changes. How do the market prices for TIPs bonds change with inflation expectations and CPI?
The inflation breakeven rate is defined as the difference between a nominal Treasury and TIPS of the same term. So when nominal rates rise, real yields also tend to rise. But not always. When they divert, it means inflation expectations are changing. In recent weeks, inflation expectations have been falling, so the spread between nominal Treasurys and TIPS has been decreasing. CPI numbers don’t necessarily affect real yields, surprisingly, because CPI is inflation in the past and TIPS yields are inflation in the future.
Thanks for the clarification. So if inflation expectations fall will the price of the TIPs bond in the secondary market rise?
Not necessarily, but a declining inflation breakeven rate does indicate that TIPS are out-performing nominal Treasurys at that time. The price of a TIPS is set by its real yield. When yields rise, the TIPS value falls. When yields fall, the value rises.
Why would one buy a TIPS security at auction or reissue with only approximate knowledge of real yield, when one could buy a similar duration TIPS security in the secondary market knowing the real yield up front? With frequent fluctuations in real yield, wouldn’t the secondary market provide a better opportunity to capture a higher real yield than at issue or reissue?
Please let me know if I’m misunderstanding something. Thank you!
I think it is fine to buy on the secondary market, as long as you know there could be a bid-ask spread and sometimes fairly high purchase requirements. I write about every auction, and I am comfortable buying at auction. In the past, when I bought at TreasuryDirect, I would wait until late in the morning to place an order, and know fairly accurately what was coming. With brokerages, that’s not possible, so that is a downside, I admit. Before the last 5-year auction, auctions for months had been getting a higher-than-market yields, so it can swing either way.
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?
I am not a lawyer, far from it, but I believe the beneficiaries would be those you have named for that IRA account at Fidelity.
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?
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.
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!
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.)
Pingback: Attention investors: TIPS are now a viable, attractive alternative to I Bonds | Treasury Inflation-Protected Securities
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?
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.
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?
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.
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.
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.
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?
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.
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?
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.
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?
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.
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?
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.
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?
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.
@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.
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?
On March 10, right at the end of QE, the Fed had $388 billion of TIPS on its balance sheet.
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.
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.
Hi, David!
Hope all is well with you. A question for you. Where can i find the actual Department of Treasury press releases of recent TIPS auction results showing primary dealers bidders, direct bidders and indirect bidderts and mounts awarded to treasurydirect holders, etc? Thanks
After the auction closes, those reports are posted here: https://www.treasurydirect.gov/auctions/announcements-data-results/announcement-results-press-releases/auction-results/ You can use the pull-down area at the bottom to see recent results for all auctions.
Is there any advantage (or disadvantage) to purchasing TIPS via a bond fund, i.e. Vanguard VAIPX fund?
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.
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
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.
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!
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%.
Correction: “below-mentioned”
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
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.)
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.
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.
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.
Hi David,
I hope you are enjoying Italia.
There is an auction of new 5 year TIPS on April 21, and since you have to buy these somewhat blind from a new auction, I am trying to get a grasp of what the yield and coupon and thus price might be BEFORE the auction.
This site shows some data in the second chart, ie, coupon of 0.125, yield of -0.65, and price of 103.57 (as of today).
https://www.bloomberg.com/markets/rates-bonds/government-bonds/us
Do the rates shown at the site on the day before or of the auction give a good idea of what these values might be from the auction? Ie. if buying 10k of these, the cost would be roughly $10,357 for a coupon value of .125 and yield to maturity of about -.65?
thank you!
Chris
I will be writing a preview of that TIPS auction this weekend. As of yesterday’s market close, the estimated real yield was -0.57%, about 100 basis points higher than where the 5-year TIPS started the year. So it’s getting more attractive, but of course the I Bond with a real yield of 0.0% remains a better investment.
Grazie David,
I am still curious if the rates shown at this site (or others like it) on the day before or of the auction give a good idea of what these values might be from the auction?
https://www.bloomberg.com/markets/rates-bonds/government-bonds/us
a doppo
Chris
Yes. The Bloomberg site shows how the most recently issued TIPS of each term is trading. It’s the best site to use for reopenings. The Treasury estimates are a bit better for new issues, but update only once a day … https://home.treasury.gov/policy-issues/financing-the-government/interest-rate-statistics?data=realyield
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,
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.
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.
It is possible, but it could be excessively complicated. First, TreasuryDirect requires an individual purchaser to have a U.S. Social Security Number. Second, you must have a U.S. address of record. Third, you need to have “an account at a U.S. depository financial institution that will accept debits and credits using the Automated Clearing House method of payment.” https://www.treasurydirect.gov/indiv/help/TDHelp/faq.htm
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
Maybe I should’ve posted this question in a different thread, but this is the only Q&A thread on your site.
You can redeem any I Bond at any time after owning it for one year. If you redeem before five years, you will lose three months interest.
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?
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.
I notice that the SEC 30 day yield on TIPS funds (like TIKRX) is currently around 1%. Is this the real yield (above inflation)? Its distribution rate is 9.5% (at NAV).
It is down significantly this year but I am considering moving into inflation indexed funds. Buying individual bonds in my TIAA Cref retirement is difficult (if not impossible).
Any thoughts?
Vanguard reports SEC 30 day as real yield for its TIPS funds. Some other fund families don’t do that. I’m guessing that 1% is the current 30-day real yield for TIKRX. However, Vanguard’s VTAPX is showing 1.96%. They are similar funds but TIKRX has a shorter duration
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?
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).
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.
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
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.
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.)
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.
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.)
Hi David,
Any foreign country TIPS one might consider? Switzerland …?
good site, question, have you looked at the iShares TIP? is there a closed end fund that gives juice to the basic TIP?
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.
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.
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.
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
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.
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.
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…
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
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.
Thanks…I was thinking in terms of spending each TIPS as it matures rather than rolling them.
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)…
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
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?
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
Mark, almost certainly TIPS yields will rise along with overall rates.
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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
Sliffle, great questions. I added answers to these at the bottom of the ‘Why Tips’ post.
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?