What's up (or down) with TIPS?

[protagonist]

No, we can't conclude that.

The market effectively decides what real rates are. The market consists of many many buyers and sellers each with their own opinion of what's a good trade, where rates are headed, why rates are going one way or another. There's nothing in all that which says real rates must have a ceiling of X.Y%.

We hit 2.5% back in Oct 2023, only to watch it go down a bit, then back up, then sideways, etc., then back to 2.5% again.

Same thing could happen again for no clear reason.

Agreed.

A Bayesian might reasonably include that 2.5% is close to or at the high yield to be expected from TIPS; but there is no way to know because ... asset returns are not stationary. Treasury bonds under the gold standard had real returns of 5%, 6% and more. They had never had negative real returns over multi-decades before the 20th century.

No one knows the future. Unfortunately, you still have to make investment decisions, like "Is now a good time to buy TIPS?"

A chaos/complexity theorist would also agree with your Bayesian friend.

The economy/inflation is a complex, nonlinear system...dependent on a myriad of unknown and largely unpredictable factors, some objective and some subjective (one of which might be consistent with pjddjp007's speculation about what drove the high yields for TIPS when they were introduced).

What is obvious to me is that now IS a good time to buy TIPS, if one's objective for the TIPS portion of your portfolio is wealth preservation, since one is guaranteed a solid, positive real yield.

But if one's objective in buying TIPS is to time when to buy TIPS for maximum return, or, say, beat the real returns of other investments (like nominals for instance), I agree that no one knows the future. It is easy to regret not buying at a peak, but the real question to ask, for me at least, is: "Is this investment serving its purpose?"

The purpose of TIPS in my portfolio is to minimize my anxiety over, (and time spent thinking about), money... and thus maximize my overall joy.
i.e.: One less thing to worry about.

[pjddjp007]

No one knows the future. Unfortunately, you still have to make investment decisions, like "Is now a good time to buy TIPS?"

Agree 100%. I wasn't predicting that > 2.5% is impossible, but rather simply saying that > 2.5% is unlikely. This motivates a decision to conclude that, "Yes, last month was a good time to buy TIPS."

And, as a corollary, "No, do not lock in short-term profits by selling appreciated TIPS in hopes of re-purchasing later, because more likely than not, you won't be able to get them at such a good price again."

Thanks to you and others, I feel confident that I was right to buy a lot of TIPS last month, and I am right to stay with the original plan and hold them to maturity.

I also agree with a point you made previously: that if there is an enormous bear market and equities fall 40-50%, I might then reconsider and sell appreciated TIPS to get more equity exposure. For now, thanks to this robust discussion, my motto is "Stay the course and hold to maturity."

[pjddjp007]

Agreed.

A Bayesian might reasonably include that 2.5% is close to or at the high yield to be expected from TIPS; but there is no way to know because ... asset returns are not stationary. Treasury bonds under the gold standard had real returns of 5%, 6% and more. They had never had negative real returns over multi-decades before the 20th century.

No one knows the future. Unfortunately, you still have to make investment decisions, like "Is now a good time to buy TIPS?"

A chaos/complexity theorist would also agree with your Bayesian friend.

The economy/inflation is a complex, nonlinear system...dependent on a myriad of unknown and largely unpredictable factors, some objective and some subjective (one of which might be consistent with pjddjp007's speculation about what drove the high yields for TIPS when they were introduced).

What is obvious to me is that now IS a good time to buy TIPS, if one's objective for the TIPS portion of your portfolio is wealth preservation, since one is guaranteed a solid, positive real yield.

But if one's objective in buying TIPS is to time when to buy TIPS for maximum return, or, say, beat the real returns of other investments (like nominals for instance), I agree that no one knows the future. It is easy to regret not buying at a peak, but the real question to ask, for me at least, is: "Is this investment serving its purpose?"

The purpose of TIPS in my portfolio is to minimize my anxiety over, (and time spent thinking about), money... and thus maximize my overall joy.
i.e.: One less thing to worry about.

Yes!! Agree 100%!!

[protagonist]

I also agree with a point you made previously: that if there is an enormous bear market and equities fall 40-50%, I might then reconsider and sell appreciated TIPS to get more equity exposure.

I don't think I would sell TIPS for that reason. We were very lucky following the 2008 crash that stocks rebounded as quickly as they did.
It depends if you want to assume more risk for the potential of more rewards. Stocks and TIPS serve very different functions in my portfolio.

[oldcomputerguy]

Member pjddjp007 has a question about investing in non-US inflation-protected bonds - TIPS equivalents for TIPS aficionados concerned about concentration.

[Kevin M]

The Jan 2025 CPI update was released today. The headline number reported is a 0.5% increase for the month of Jan, but that's the seasonally adjusted value, which is 0.47% to two decimal places. The non-seasonal increase, which is what is relevant for TIPS inflation adjustments, was 0.65%. Since the Jan non-seasonal CPI value sets the reference CPI for April 1, we will see a 0.65% increase in our TIPS inflation adjustments in the month of March.

That's the highest inflation adjustment since May 2024, which was determined by the March 2024 CPI which determined the 6/1/2024 ref CPI, and was also 0.65%.

A monthly increase of 0.65% is an annualized rate of 8.14%. Of course monthly CPI change is volatile, so the annualized rate doesn't mean much, but I still like to note it. For example, the CPI change last month was 0.04%, which is 0.43% annualized.

[protagonist]

The Jan 2025 CPI update was released today. The headline number reported is a 0.5% increase for the month of Jan, but that's the seasonally adjusted value, which is 0.47% to two decimal places. The non-seasonal increase, which is what is relevant for TIPS inflation adjustments, was 0.65%. Since the Jan non-seasonal CPI value sets the reference CPI for April 1, we will see a 0.65% increase in our TIPS inflation adjustments in the month of March.

That's the highest inflation adjustment since May 2024, which was determined by the March 2024 CPI which determined the 6/1/2024 ref CPI, and was also 0.65%.

A monthly increase of 0.65% is an annualized rate of 8.14%. Of course monthly CPI change is volatile, so the annualized rate doesn't mean much, but I still like to note it. For example, the CPI change last month was 0.04%, which is 0.43% annualized.

Kevin, is 0.65% for January really that exceptional?
It seems high, but my understanding is that inflation is usually highest around January and February.
When you state a seasonally adjusted rate of 0.47% , does that then equate to a projected annual rate of 0.47% x 12 = 5.64% for 2025? (still quite high).

[LadyGeek]

protagonist has a TIPS-related question which I've moved into a new thread. See: Selling condo. How do I finance a more expensive one?

[Kevin M]

The Jan 2025 CPI update was released today. The headline number reported is a 0.5% increase for the month of Jan, but that's the seasonally adjusted value, which is 0.47% to two decimal places. The non-seasonal increase, which is what is relevant for TIPS inflation adjustments, was 0.65%. Since the Jan non-seasonal CPI value sets the reference CPI for April 1, we will see a 0.65% increase in our TIPS inflation adjustments in the month of March.

That's the highest inflation adjustment since May 2024, which was determined by the March 2024 CPI which determined the 6/1/2024 ref CPI, and was also 0.65%.

A monthly increase of 0.65% is an annualized rate of 8.14%. Of course monthly CPI change is volatile, so the annualized rate doesn't mean much, but I still like to note it. For example, the CPI change last month was 0.04%, which is 0.43% annualized.

Kevin, is 0.65% for January really that exceptional?
It seems high, but my understanding is that inflation is usually highest around January and February.
When you state a seasonally adjusted rate of 0.47% , does that then equate to a projected annual rate of 0.47% x 12 = 5.64% for 2025? (still quite high).

Good point about Jan inflation; no, not particularly exceptional. Here is a chart of month over month NSCPI change for Jan since 2005:



Your calculation of annualized seasonal inflation is close, but I assume monthly compounding, in which case the annualized value is 5.75%.

[Kevin M]

The Feb 2055 30-year TIPS was auctioned on 02/20/25 and will be issued tomorrow, 02/28/25. I noticed a few days ago that it had started trading at Schwab on a when-issued basis (settlement 2/28).

The yield at auction was 2.403%, but the 30-year yield has been generally declining since then, and today the ask yield at Schwab when I pulled quotes was 2.290%.

Here is the ask yield curve today:

[Kendall]

An off-topic post with a video link speculating about CPI tampering has been removed (political).

As a reminder, comments regarding government manipulation of the Consumer Price Index are political in nature and off-topic. From the U.S. Bureau of Labor Statistics, here's why:

As an economic indicator. As the most widely used measure of inflation, the CPI is an indicator of the effectiveness of government policy. In addition, business executives, labor leaders and other private citizens use the index as a guide in making economic decisions.

The wiki has further information: Accuracy of the CPI

[Kevin M]

Here is the breakeven inflation (BEI) curve based on ask quotes I downloaded from Fidelity a bit earlier today:



BEI usually is calculated at the nominal Treasury yield minus the TIPS yield at a given maturity. I use "geometric subtraction", (1+i)/(1+n)-1, instead of linear subtraction, i - n, but the difference is minimal, so we would barely notice it in the chart above.

Just as TIPS yields are smoothed by using yields that are adjusted for seasonality plus outlier factors (SA+O), the breakeven inflation curve is smoothed by using SA+O TIPS yields in the BEI calculations. I believe the SA+O values are more meaningful, but note that it makes very little difference for maturities of 2040 and beyond.

I've truncated the vertical axis at 3%, which shows the SA+O BEI of 2.96% for the Jul 2025, but not the SA+O BEI of 4.69% for the Apr 2025; I don't think the real yields or BEIs have much meaning for the shortest maturities.

[InvestLikeMike]

Here is the breakeven inflation (BEI) curve based on ask quotes I downloaded from Fidelity a bit earlier today:



BEI usually is calculated at the nominal Treasury yield minus the TIPS yield at a given maturity. I use "geometric subtraction", (1+i)/(1+n)-1, instead of linear subtraction, i - n, but the difference is minimal, so we would barely notice it in the chart above.

Just as TIPS yields are smoothed by using yields that are adjusted for seasonality plus outlier factors (SA+O), the breakeven inflation curve is smoothed by using SA+O TIPS yields in the BEI calculations. I believe the SA+O values are more meaningful, but note that it makes very little difference for maturities of 2040 and beyond.

I've truncated the vertical axis at 3%, which shows the SA+O BEI of 2.96% for the Jul 2025, but not the SA+O BEI of 4.69% for the Apr 2025; I don't think the real yields or BEIs have much meaning for the shortest maturities.

For anyone interested, my site has daily updates for the TIPS yields and breakevens, including seasonal adjustments. Inspired by this post (Thanks Kevin!) I also made a quick addition to the setting menu to allow the breakeven curve to be shown in isolation, as in the screenshot below. Hope some of you find it useful!

[Kevin M]

For anyone interested, my site has daily updates for the TIPS yields and breakevens, including seasonal adjustments. Inspired by this post (Thanks Kevin!) I also made a quick addition to the setting menu to allow the breakeven curve to be shown in isolation, as in the screenshot below. Hope some of you find it useful!

Nice!

[Kevin M]

The Feb CPI numbers were released today. Here's the summary from the BLS CPI webpage:

In February, the Consumer Price Index for All Urban Consumers rose 0.2 percent, seasonally adjusted, and rose 2.8 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.2 percent in February (SA); up 3.1 percent over the year (NSA).

Here are the NSA and SA values for both Feb and the 12 months ending in Feb:

Code: Select all

	Feb	12m
	-----	-----
NSA	0.44%	2.82%
SA	0.22%	2.81%

The Feb NSA value of 0.44% will be the monthly adjustment for our TIPS in April, since the Feb NSA CPI value sets the May 1 reference CPI. The April daily changes to the index ratios for all TIPS are the values interpolated between the April 1 and May 1 reference NSA CPI values. This 0.44% increase in April represents an annualized increase of 5.46%.

As we discussed last month, CPI typically increases more in the first half of the year. Here is the chart of monthly NSA CPI change since Feb 2022:

[rockstar]

No, we can't conclude that.

The market effectively decides what real rates are. The market consists of many many buyers and sellers each with their own opinion of what's a good trade, where rates are headed, why rates are going one way or another. There's nothing in all that which says real rates must have a ceiling of X.Y%.

We hit 2.5% back in Oct 2023, only to watch it go down a bit, then back up, then sideways, etc., then back to 2.5% again.

Same thing could happen again for no clear reason.

Agreed.

A Bayesian might reasonably include that 2.5% is close to or at the high yield to be expected from TIPS; but there is no way to know because ... asset returns are not stationary. Treasury bonds under the gold standard had real returns of 5%, 6% and more. They had never had negative real returns over multi-decades before the 20th century.

No one knows the future. Unfortunately, you still have to make investment decisions, like "Is now a good time to buy TIPS?"

I have money to deploy next week. And nominals look better than TIPS for 1-3 years out since you’d need inflation around 3% for equivalent nominal yields. You really need tariffs to push up the average inflation rate up to 3% or higher. I’m not sure if that’s going to happen.

[Kevin M]

Agreed.

A Bayesian might reasonably include that 2.5% is close to or at the high yield to be expected from TIPS; but there is no way to know because ... asset returns are not stationary. Treasury bonds under the gold standard had real returns of 5%, 6% and more. They had never had negative real returns over multi-decades before the 20th century.

No one knows the future. Unfortunately, you still have to make investment decisions, like "Is now a good time to buy TIPS?"

I have money to deploy next week. And nominals look better than TIPS for 1-5 years out since you’d need inflation around 3% for equivalent nominal yields. You really need tariffs to push up the average inflation rate up to 3% or higher. I’m not sure if that’s going to happen.

So you think your estimate of future inflation is better than the institutional investors who determine the yields for nominals and TIPS, and therefore set the breakeven inflation (BEI) rates?

I personally would not want to take the unexpected inflation risk for maturities longer than a year or two in general, and no more than a month or two at present.

[rockstar]

I have money to deploy next week. And nominals look better than TIPS for 1-5 years out since you’d need inflation around 3% for equivalent nominal yields. You really need tariffs to push up the average inflation rate up to 3% or higher. I’m not sure if that’s going to happen.

So you think your estimate of future inflation is better than the institutional investors who determine the yields for nominals and TIPS, and therefore set the breakeven inflation (BEI) rates?

I personally would not want to take the unexpected inflation risk for maturities longer than a year or two in general, and no more than a month or two at present.

Tariff expectations are changing daily. There is no way it’s priced in correctly. I think investors have piled into TIPS recently as a result, so unless we get a really big spike in inflation, nominals could potentially beat them. It’s definitely a gamble. But they’re not the clear, obvious winner like they were two months ago.

April 2026 TIPS is 1.039 per the WSJ. 1 year nominal is 4.071 per CNBC. That’s a breakeven of 3.032. That seems high.

Seasonally adjusted CPI was 2.8%.

You need higher than 3% inflation this year for TIPS to win.

I guess it’s possible.

[chrisdds98]

Tariff expectations are changing daily. There is no way it’s priced in correctly.

good point, inflation expectations might be too low

who knows what will happen, it sure seems like the admin is determined to go heavy on tariffs regardless of cost

[rockstar]

Tariff expectations are changing daily. There is no way it’s priced in correctly.

good point, inflation expectations might be too low

who knows what will happen, it sure seems like the admin is determined to go heavy on tariffs regardless of cost

Food is 13% of CPI. Auto is about 8% when you include maintenance. So to get 30bps of inflation, you’d need these items to go up about 15%. That doesn’t seem likely.

[IDpilot]

good point, inflation expectations might be too low

who knows what will happen, it sure seems like the admin is determined to go heavy on tariffs regardless of cost

Food is 13% of CPI. Auto is about 8% when you include maintenance. So to get 30bps of inflation, you’d need these items to go up about 15%. That doesn’t seem likely.

There have been various estimates of the impact of tariffs on new car pricing. They range from seven to twenty-five percent price increase.

[rockstar]

Food is 13% of CPI. Auto is about 8% when you include maintenance. So to get 30bps of inflation, you’d need these items to go up about 15%. That doesn’t seem likely.

There have been various estimates of the impact of tariffs on new car pricing. They range from seven to twenty-five percent price increase.

New autos are about 4% of CPI. And auto maintenance is about 2%. Even if it’s that high, it will have a marginal impact on the overall number.

[IDpilot]

There have been various estimates of the impact of tariffs on new car pricing. They range from seven to twenty-five percent price increase.

New autos are about 4% of CPI. And auto maintenance is about 2%. Even if it’s that high, it will have a marginal impact on the overall number.

If car prices can reasonably be expected to increase by these margins, why not other items? And if enough of them do, what will that mean for you forecast of nominal bonds returning more than TIPS? The bottom line is that no one knows what inflation will do for the next six months let along the next ten years, so plan accordingly based on one's particular situation and risk profile.

[rockstar]

New autos are about 4% of CPI. And auto maintenance is about 2%. Even if it’s that high, it will have a marginal impact on the overall number.

If car prices can reasonably be expected to increase by these margins, why not other items? And if enough of them do, what will that mean for you forecast of nominal bonds returning more than TIPS? The bottom line is that no one knows what inflation will do for the next six months let along the next ten years, so plan accordingly based on one's particular situation and risk profile.

I feel better with TIPS with a 2.5% breakeven than one over 3%. I have to take duration risk though.

[lazyday]

Is there a TIPS chart or table that shows duration vs yield?

With long TIPS coupons ranging from .125 to 2.375, duration might be more useful than maturity. Though maturity date would also be needed to see which TIPS corresponds to each point or row.

[Johnnie]

This TIPS newb doesn't understand how monthly Vanguard statements report my TIPS earnings.

So TIPS returns have two components, the inflation adjustment to principle, and the additional interest that's specified when you buy the bond. Looking at the "Holdings" section of the VG daily online version, I see the current "Price," the change by dollar and percentage, the "Quantity" and the "Current Balance."

I bought the bond 11 months ago, and the online "Current Value" amount appears to be the purchase amount plus an amount that's looks like the approximate sum of both components of the return: the inflation adjustment and the net-earnings that I can spend. But it doesn't say that, and nowhere do I see anything that looks like a payment of that last item, either as a reinvestment or a payment. IOW, I'm just guessing what that "Current Value" figure represents.

What I'm hoping to discover is two figures: The amount of the inflation-adjustment to the principle, and the amount representing the earned interest I can spend.

BTW, I bought the bond almost a year ago based on Boglehead Kevin M's advisory here that the current 2.15 rate then was a pretty decent level. Thank you Kevin!

[exodusing]

This TIPS newb doesn't understand how monthly Vanguard statements report my TIPS earnings.

So TIPS returns have two components, the inflation adjustment to principle, and the additional interest that's specified when you buy the bond. Looking at the "Holdings" section of the VG daily online version, I see the current "Price," the change by dollar and percentage, the "Quantity" and the "Current Balance."

I bought the bond 11 months ago, and the online "Current Value" amount appears to be the purchase amount plus an amount that's looks like the approximate sum of both components of the return: the inflation adjustment and the net-earnings that I can spend. But it doesn't say that, and nowhere do I see anything that looks like a payment of that last item, either as a reinvestment or a payment. IOW, I'm just guessing what that "Current Value" figure represents.

What I'm hoping to discover is two figures: The amount of the inflation-adjustment to the principle, and the amount representing the earned interest I can spend.

BTW, I bought the bond almost a year ago based on Boglehead Kevin M's advisory here that the current 2.15 rate then was a pretty decent level. Thank you Kevin! p

Just to be clear, did you buy a TIPS bond, rather than a fund? If so, which bond and on what date?

The current value of a bond or fund is the market price of that bond or of the bonds in the fund. That depends on relevant interest rates, inflation expectations and whatever else the market considers relevant. Inflation adjustment is a function of CPI on purchase date and today (see https://eyebonds.info/tips/help.html for detail).

If you bought an individual bond, interest would be paid into your settlement fund, not reinvested automatically. If you bought a fund, interest payments may have been paid or reinvested depending on your settings.

In either event, you can spend the interest paid into your settlement fund. Beyond that, you'd have to sell something to get money to spend (or wait until maturity if a bond) without being limited by the portion that's interest.

[Johnnie]

Thanks, Exo. Your hand-holding helped.

My VG IRA bought the actual bond:
U S TREASURY NOTE INFLATION INDEX NOTE 2.125% 04/15/29 04/15/24

What you wrote is what I've been looking for in my statements - payments into the settlement account - but I hadn't found them. The only figures listed for this holding on the "Holdings" page are "price" followed by "$ change" and "% change."

OK, I think I found it. When I navigated to a "summary of recent transactions" in that fund (for the past two months) it created a couple PDFs that appear to show what I'm looking for. Specifically, the monthly "sweep in" amount for the settlement MMF holding.

Bingo - the month-end amounts look like the right kind of number for a 2.125% bond.

(2.125% - Wish I'd bought more of it. I didn't do too bad on that though. )

[Kevin M]

So you think your estimate of future inflation is better than the institutional investors who determine the yields for nominals and TIPS, and therefore set the breakeven inflation (BEI) rates?

I personally would not want to take the unexpected inflation risk for maturities longer than a year or two in general, and no more than a month or two at present.

Tariff expectations are changing daily. There is no way it’s priced in correctly.

Why in the world would you think that? Treasury prices change daily in response to whatever institutional investors think will affect their returns. What you're basically saying is that the Treasury markets are not efficient, but they're probably the most efficient markets in the world.

I think investors have piled into TIPS recently as a result, so unless we get a really big spike in inflation, nominals could potentially beat them. It’s definitely a gamble. But they’re not the clear, obvious winner like they were two months ago.

Investors would pile into TIPS only if they thought the risk of inflation was higher. Again, everything you say indicates that you think you know more than the institutional investors who buy and sell Treasuries (nominals and TIPS) for a living. There's never a clear winner when it comes to nominals vs. TIPS--if there were, everyone would pile into the clear winner, and that "clarity" would vanish within minutes. That's how efficient markets work.

Seasonally adjusted CPI was 2.8%.

First, that's backwards looking. Second, that's a year over year number. Third, TIPS inflation adjustments are based on non-seasonally adjusted (NSA) CPI. As I shared, the annualized NSA adjustment for Feb was 5.46%, so if you're going to look in the rear view mirror, this would be the number relevant to TIPS, but looking in the rear view mirror is not very useful in making investment decisions--markets are forward looking.

[rockstar]

Tariff expectations are changing daily. There is no way it’s priced in correctly.

Why in the world would you think that? Treasury prices change daily in response to whatever institutional investors think will affect their returns. What you're basically saying is that the Treasury markets are not efficient, but they're probably the most efficient markets in the world.

I think investors have piled into TIPS recently as a result, so unless we get a really big spike in inflation, nominals could potentially beat them. It’s definitely a gamble. But they’re not the clear, obvious winner like they were two months ago.

Investors would pile into TIPS only if they thought the risk of inflation was higher. Again, everything you say indicates that you think you know more than the institutional investors who buy and sell Treasuries (nominals and TIPS) for a living. There's never a clear winner when it comes to nominals vs. TIPS--if there were, everyone would pile into the clear winner, and that "clarity" would vanish within minutes. That's how efficient markets work.

Seasonally adjusted CPI was 2.8%.

First, that's backwards looking. Second, that's a year over year number. Third, TIPS inflation adjustments are based on non-seasonally adjusted (NSA) CPI. As I shared, the annualized NSA adjustment for Feb was 5.46%, so if you're going to look in the rear view mirror, this would be the number relevant to TIPS, but looking in the rear view mirror is not very useful in making investment decisions--markets are forward looking.

I don’t believe the markets are efficient. We haven’t had tariffs of any significance since WWII. Anybody that would have dealt with them are either retired or dead.

Last year’s inflation is the only reasonable thing I can base any prediction on. I have no clue what it will be. But last year is a good starting place.

[Johnnie]

CORRECTION/REVISION TO THE FOLLOWING IN MY PREVIOUS POST HERE SEVERAL MINUTES AGO:

"the month-end amounts look like the right kind of number for a 2.125% (TIPS) bond"

Not quite. The statement does not indicate whether that is the monthly Gross Interest on the TIPS bond - inflation adjustment AND cash in the owners pocket. If it only includes the latter then it's too high. If it includes both components then it may be correct, but I don't know what the inflation-adjustment figure is so I can't tell for sure. The figure shown suggests the inflation-adjustment component would have been about one-third the size of the 2.125 interest component.

I thought I read that the inflation component is paid twice a year, in April and October. I bought the bond in April, so maybe it has only received of these payments. I don't know what inflation increase figure they would be using this past year.

[Kevin M]

Is there a TIPS chart or table that shows duration vs yield?

With long TIPS coupons ranging from .125 to 2.375, duration might be more useful than maturity. Though maturity date would also be needed to see which TIPS corresponds to each point or row.

Here you go.



I'm showing durations based on Seasonally Adjusted plus Outlier Factor (SAO) yields, which are more meaningful, but don't impact long-term values.

[Kevin M]

Why in the world would you think that? Treasury prices change daily in response to whatever institutional investors think will affect their returns. What you're basically saying is that the Treasury markets are not efficient, but they're probably the most efficient markets in the world.

Investors would pile into TIPS only if they thought the risk of inflation was higher. Again, everything you say indicates that you think you know more than the institutional investors who buy and sell Treasuries (nominals and TIPS) for a living. There's never a clear winner when it comes to nominals vs. TIPS--if there were, everyone would pile into the clear winner, and that "clarity" would vanish within minutes. That's how efficient markets work.

First, that's backwards looking. Second, that's a year over year number. Third, TIPS inflation adjustments are based on non-seasonally adjusted (NSA) CPI. As I shared, the annualized NSA adjustment for Feb was 5.46%, so if you're going to look in the rear view mirror, this would be the number relevant to TIPS, but looking in the rear view mirror is not very useful in making investment decisions--markets are forward looking.

I don’t believe the markets are efficient. We haven’t had tariffs of any significance since WWII. Anybody that would have dealt with them are either retired or dead.

Last year’s inflation is the only reasonable thing I can base any prediction on. I have no clue what it will be. But last year is a good starting place.

Then we'll have to agree to disagree. Everything I've ever read indicates that Treasury markets are among the most, if not the most, efficient in the world, and that they're very efficient. One indicator of this is the very low bid/ask spreads.

The potential impact of tariffs on inflation is widely reported on, even in the retail press, so institutional investors certainly understand it.

Breakeven inflation (BEI) is widely understood to be a decent proxy for inflation expectations; yes, there are two liquidity risk premia, but they work in opposite directions, and can't be directly observed, so a reasonable first order approximation is to ignore them. If you want to refine the BEI estimates based on the liquidity premia, there are models that attempt to estimate them, but even the models don't agree with each other.

I did some analysis awhile ago and it was clear that BEI is a much better predictor of future inflation than is past inflation, but of course neither one is very good. The value of TIPS is to hedge unexpected inflation, which is not captured in either BEI (expected inflation) or past inflation. So if BEI (or past inflation) was a reliable indicator, TIPS would have no advantage over nominals.

Normally I wouldn't worry too much about 1-year unexpected inflation, so normally I wouldn't argue much against holding nominals out to 1-year maturity, but as you point out, there's a lot of unusual stuff going on, which leads me to keep my nominal maturities much shorter now.

[Kevin M]

This TIPS newb doesn't understand how monthly Vanguard statements report my TIPS earnings.

So TIPS returns have two components, the inflation adjustment to principle, and the additional interest that's specified when you buy the bond. Looking at the "Holdings" section of the VG daily online version, I see the current "Price," the change by dollar and percentage, the "Quantity" and the "Current Balance."

I bought the bond 11 months ago, and the online "Current Value" amount appears to be the purchase amount plus an amount that's looks like the approximate sum of both components of the return: the inflation adjustment and the net-earnings that I can spend. But it doesn't say that, and nowhere do I see anything that looks like a payment of that last item, either as a reinvestment or a payment. IOW, I'm just guessing what that "Current Value" figure represents.

What I'm hoping to discover is two figures: The amount of the inflation-adjustment to the principle, and the amount representing the earned interest I can spend.

BTW, I bought the bond almost a year ago based on Boglehead Kevin M's advisory here that the current 2.15 rate then was a pretty decent level. Thank you Kevin!

The earnings from TIPS coupons (the stated interest rate) probably aren't included in the values shown in your Holdings page. Interest accrues daily, so when you buy or sell, the accrued interest is included in the total price. However, prices are quotes excluding accrued interest.

If you're interested in the accrued interest, you can look it up in a bond search results page (some brokers), or initiate a buy or sell order until you get to the preview screen, which will show the accrued interest, or calculate it yourself.

The adjusted price of one TIPS ($1,000 face value), excluding accrued interest, is price/100 * index ratio (aka inflation factor). Some brokers show both the unadjusted price and adjusted price. You can always lookup or calculate the index ratio and calculate the adjusted price yourself. I've probably already gone over how to do all of this in this thread, but could review it again if you can't easily find it. You can start by looking at the Help in the left column on this web page: https://eyebonds.info/tips/help.html

[exodusing]

Why in the world would you think that? Treasury prices change daily in response to whatever institutional investors think will affect their returns. What you're basically saying is that the Treasury markets are not efficient, but they're probably the most efficient markets in the world.

Investors would pile into TIPS only if they thought the risk of inflation was higher. Again, everything you say indicates that you think you know more than the institutional investors who buy and sell Treasuries (nominals and TIPS) for a living. There's never a clear winner when it comes to nominals vs. TIPS--if there were, everyone would pile into the clear winner, and that "clarity" would vanish within minutes. That's how efficient markets work.

First, that's backwards looking. Second, that's a year over year number. Third, TIPS inflation adjustments are based on non-seasonally adjusted (NSA) CPI. As I shared, the annualized NSA adjustment for Feb was 5.46%, so if you're going to look in the rear view mirror, this would be the number relevant to TIPS, but looking in the rear view mirror is not very useful in making investment decisions--markets are forward looking.

I don’t believe the markets are efficient. We haven’t had tariffs of any significance since WWII. Anybody that would have dealt with them are either retired or dead.

Last year’s inflation is the only reasonable thing I can base any prediction on. I have no clue what it will be. But last year is a good starting place.

The question isn't so much whether markets are efficient, the question here is whether you are better at interpreting widespread economic news than institutional treasury traders and are better pricing treasuries (TIPS and nominals) than them. Do you believe this to be the case?

[Kevin M]

I thought I read that the inflation component is paid twice a year, in April and October. I bought the bond in April, so maybe it has only received of these payments. I don't know what inflation increase figure they would be using this past year.

Inflation adjustments are applied daily. Interest is paid semi-annually, and for one bond it's rate/2 * 1,000 * index ratio (for the day the interest is paid).

The interest payment dates depend on the maturity date. For TIPS that mature 4/15 of the maturity year, you'll receive interest payments on 4/15 and 10/15. For TIPS that mature 2/15/YY (all TIPS that mature in 2040 or later), you'll receive interest payments on 2/15/ and 8/15, etc.

You can look up index ratios in different places, one being the eyebonds.info website that I shared the link for already.

[Kevin M]

Since the Feb CPI, published yesterday, sets the ref CPI for May 1, the inflation adjusted maturity value of the Apr 15 2025 TIPS now is known. This means that this TIPS now is trading as a nominal bond, so the real yield has little if any meaning.

Here are the calculations of the final value of one bond ($1,000 face value):

Dated date ref CPI: 258.30093¹
Apr 15 2025 ref CPI: 318.32947²
Index ratio on 4/15/2025 = 318.32947 / 258.30093 = 1.23240
Value of one bond = 1,000 * 1.23240 = 1,232.40

Notes:

1. I get dated date ref CPI from a lookup table I create in a Google sheet from data I pull in from the eyebonds.info website with this formula:

   Code: Select all

   =IMPORTHTML("http://eyebonds.info/tips/tipslist_mat.html","table",1)

2. One can also get ref CPIs by date from eyebonds.info, for example for 2025 from here, but I created a spreadsheet in which I calculate them, and I import values from that spreadsheet into whatever spreadsheet in which I need them.
   
   I calculate the daily interpolated ref CPI values from monthly CPI data (CPIAUCNS) I import from FRED. One can download the data manually using the link provided, but some years ago I created a Google Sheets app script to import it using a custom function.

[rockstar]

I don’t believe the markets are efficient. We haven’t had tariffs of any significance since WWII. Anybody that would have dealt with them are either retired or dead.

Last year’s inflation is the only reasonable thing I can base any prediction on. I have no clue what it will be. But last year is a good starting place.

Then we'll have to agree to disagree. Everything I've ever read indicates that Treasury markets are among the most, if not the most, efficient in the world, and that they're very efficient. One indicator of this is the very low bid/ask spreads.

The potential impact of tariffs on inflation is widely reported on, even in the retail press, so institutional investors certainly understand it.

Breakeven inflation (BEI) is widely understood to be a decent proxy for inflation expectations; yes, there are two liquidity premia, but they work in opposite directions, and can't be directly observed, so a reasonable first order approximation is to ignore them. If you want to refine the BEI estimates based on the liquidity premia, there are models that attempt to estimate them, but even the models don't agree with each other.

I did some analysis awhile ago and it was clear that BEI is a much better predictor of future inflation than is past inflation, but of course neither one is very good. The value of TIPS is to hedge unexpected inflation, which is not captured in either BEI (expected inflation) or past inflation. So if BEI (or past inflation) was a reliable indicator, TIPS would have no advantage over nominals.

Normally I wouldn't worry too much about 1-year unexpected inflation, so normally I wouldn't argue much against holding nominals out to 1-year maturity, but as you point out, there's a lot of unusual stuff going on, which leads me to keep my nominal maturities much shorter now.

I agree.

But I do think I'm going to go out a couple of years to lock down a better real yield, so I don't have to buy at the 3% breakeven point.

[Kevin M]

Here's is the BEI based on Fidelity ask quotes from a bit earlier today:



I would go by the SA+O (Seasonally Adjusted + Outlier factor) values.

[Escapevelocity]

So you think your estimate of future inflation is better than the institutional investors who determine the yields for nominals and TIPS, and therefore set the breakeven inflation (BEI) rates?

I personally would not want to take the unexpected inflation risk for maturities longer than a year or two in general, and no more than a month or two at present.

Tariff expectations are changing daily. There is no way it’s priced in correctly. I think investors have piled into TIPS recently as a result, so unless we get a really big spike in inflation, nominals could potentially beat them. It’s definitely a gamble. But they’re not the clear, obvious winner like they were two months ago.

April 2026 TIPS is 1.039 per the WSJ. 1 year nominal is 4.071 per CNBC. That’s a breakeven of 3.032. That seems high.

Seasonally adjusted CPI was 2.8%.

You need higher than 3% inflation this year for TIPS to win.

I guess it’s possible.

The breakeven should not be thought of as purely an expectation of the inflation over the bond term. It is also an insurance policy for unexpected inflation. I think TIPS are generally undervalued because it seems to me that the value of this insurance aspect is not properly reflected in TIPS yields.

[exodusing]

Tariff expectations are changing daily. There is no way it’s priced in correctly. I think investors have piled into TIPS recently as a result, so unless we get a really big spike in inflation, nominals could potentially beat them. It’s definitely a gamble. But they’re not the clear, obvious winner like they were two months ago.

April 2026 TIPS is 1.039 per the WSJ. 1 year nominal is 4.071 per CNBC. That’s a breakeven of 3.032. That seems high.

Seasonally adjusted CPI was 2.8%.

You need higher than 3% inflation this year for TIPS to win.

I guess it’s possible.

The breakeven should not be thought of as purely an expectation of the inflation over the bond term. It is also an insurance policy for unexpected inflation. I think TIPS are generally undervalued because it seems to me that the value of this insurance aspect is not properly reflected in TIPS yields.

The breakeven most likely reflects inflation expectations, insurance against inflation and a liquidity discount (TIPS are a small part of outstanding treasuries and treasury trading). As a rough approximation, the last two probably cancel out, although there are more sophisticated models out there.

As always, consider: if your model indicates the market price is wrong, the problem is almost certainly with your model, not the market.

[Kevin M]

The breakeven should not be thought of as purely an expectation of the inflation over the bond term. It is also an insurance policy for unexpected inflation. I think TIPS are generally undervalued because it seems to me that the value of this insurance aspect is not properly reflected in TIPS yields.

The breakeven most likely reflects inflation expectations, insurance against inflation and a liquidity discount (TIPS are a small part of outstanding treasuries and treasury trading). As a rough approximation, the last two probably cancel out, although there are more sophisticated models out there.

Right, I addressed this upthread:

Breakeven inflation (BEI) is widely understood to be a decent proxy for inflation expectations; yes, there are two liquidity premia, but they work in opposite directions, and can't be directly observed, so a reasonable first order approximation is to ignore them. If you want to refine the BEI estimates based on the liquidity premia, there are models that attempt to estimate them, but even the models don't agree with each other.

I misspoke in saying "there are two liquidity premia"; I should have said "there are two risk premia".

The two premia are inflation risk premium, and TIPS liquidity premium, as described below in The Fed - Tips from TIPS: Update and Discussions:

In a recently published paper (D'Amico, Kim, and Wei (DKW), 2018), D'Amico and two of us use a no-arbitrage term structure model to decompose TIPS inflation compensation into three components—inflation expectation, inflation risk premium, and TIPS liquidity premium—over the 1990-2013 period.

Here are the formulas that relate BEI, inflation expectations, and the two premia:



Note that what they refer to as "TIPS IC" is the same as BEI; i.e., nominal yield minus TIPS (real) yield.

Here is a chart of the monthly premia for 10-year maturity from 1/4/1999 through 2/28/2025 (the most recent published value):



Note that the premia can be negative, and in fact the latest value for the 10y inflation risk premium is -0.04, while the 10y liquidity premium is 0.22.

Remember that this is just one model, and there are other models that give different results, but one can certainly plug these numbers in to refine one's BEI estimate based on this particular model.

[rockstar]

Tariff expectations are changing daily. There is no way it’s priced in correctly. I think investors have piled into TIPS recently as a result, so unless we get a really big spike in inflation, nominals could potentially beat them. It’s definitely a gamble. But they’re not the clear, obvious winner like they were two months ago.

April 2026 TIPS is 1.039 per the WSJ. 1 year nominal is 4.071 per CNBC. That’s a breakeven of 3.032. That seems high.

Seasonally adjusted CPI was 2.8%.

You need higher than 3% inflation this year for TIPS to win.

I guess it’s possible.

The breakeven should not be thought of as purely an expectation of the inflation over the bond term. It is also an insurance policy for unexpected inflation. I think TIPS are generally undervalued because it seems to me that the value of this insurance aspect is not properly reflected in TIPS yields.

The breakeven lets me think about nominals versus TIPS. We recently had unexpected inflation. Decades have past since that happened. The greater the breakeven the less confident I'm with TIPS in the short term, which is really where I keep my taxable TIPS. I go longer in my tax deferred. I have TIPS maturing today that I need to rollover next week.

I usually don't take any duration risk in my taxable bonds. But given the recent move in yields and the rise in breakeven inflation, I think I might have to take some duration risk. I'm looking at out to 2030-35, so 5-10 years, which is really more duration risk than I'd care to take. But it might make sense in the short term until the bond yields settle down. The volatility in bonds is really on the short end.

I'm thinking about TIPS from 1 year to 18 months to TIPS from 5 to 10 years, rather than gambling with nominals in the short term with a 3%+ breakeven. I can get that back down to a more realistic 2.5% by going out a bit, and if we do experience a recession, my bond yields will tank anyway, so I can sell them and buy equities if that happens.

[Kevin M]

I have TIPS maturing today that I need to rollover next week.

Today is March 15, 2025. There are no TIPS maturing in March of any year, because TIPS are not issued in March. Here are the maturity months for TIPS, based in the months they are issued:

Apr
Jul
Oct
Jan
Feb

The volatility in bonds is really on the short end.

This is not at all true for price volatility, which is what matters to the impact on your wealth. Longer duration TIPS have had much larger daily price swings lately than shorter-duration TIPS, which can easily be seen by looking at the percentage changes of TIPS ETFs of different durations. Here are the percent price changes for Friday:



This is only one day, but I look at this everyday, and LTPZ almost always has larger percentage change than the shorter-term TIPS ETFs.

In general, the longer-term bonds expose you to more price risk, which is exactly what you're referring to when you speak of "duration risk".

Keep in mind that duration risk for TIPS is relative to the duration of the liabilities (e.g., residual living expenses) you will use them to cover. A 1-year TIPS has much more "duration risk" than does a 20-year TIPS if the purpose is to fund residual living expenses in 20 years.

[rockstar]

I have TIPS maturing today that I need to rollover next week.

Today is March 15, 2025. There are no TIPS maturing in March of any year, because TIPS are not issued in March. Here are the maturity months for TIPS, based in the months they are issued:

Apr
Jul
Oct
Jan
Feb

The volatility in bonds is really on the short end.

This is not at all true for price volatility, which is what matters to the impact on your wealth. Longer duration TIPS have had much larger daily price swings lately than shorter-duration TIPS, which can easily be seen by looking at the percentage changes of TIPS ETFs of different durations. Here are the percent price changes for Friday:



This is only one day, but I look at this everyday, and LTPZ almost always has larger percentage change than the shorter-term TIPS ETFs.

In general, the longer-term bonds expose you to more price risk, which is exactly what you're referring to when you speak of "duration risk".

Keep in mind that duration risk for TIPS is relative to the duration of the liabilities (e.g., residual living expenses) you will use them to cover. A 1-year TIPS has much more "duration risk" than does a 20-year TIPS if the purpose is to fund residual living expenses in 20 years.

You're right. These are the last on my nominals CUSIP: 91282CED9.

What I meant above is that the short end yields are coming down fast. Both the 2 and 5 year nominal yields are already down 24bps since last month compared to the 10 and 30 that are only down -16 and -7 since last month.

[protagonist]

What I meant above is that the short end yields are coming down fast. Both the 2 and 5 year nominal yields are already down 24bps since last month compared to the 10 and 30 that are only down -16 and -7 since last month.

This is true.

I don't know how long that will be the case, especially if inflation heats up and the Fed. starts raising rates again.

I have some excess cash I could add to my ladder (and more when my Apr. 2025s mature) , but I am waiting it out , largely due to inertia. since I cannot decide what to do with it. I could add it to the long end of my ladder, but I already have a lot more maturing annually from 2030-2033 than at the shorter end, and 2034/2040 is taken care of (2040= age 88 for me.)

That said, right now, FZDXX (Fidelity money market) is at a 7 day yield of about 4.15% (last I checked). which is pretty close to the YTM of TIPS maturing in the next few years at today's inflation rate, with the advantage of flexibility and (in taxable) no "phantom income" tax. So I am patiently waiting to see what happens with TIPS yields before jumping in to pad my ladder. Sure, there is uncertainty involved...YTMs could go up or down....but basically I just can't decide what to do. Extend my ladder or add to distant rungs, betting on my survival? Add to more proximal rungs in case money market rates decline further? Wait and see? All options have advantages and disadvantages. So, for now, the cash is sitting in FZDXX. I probably can't go too far wrong, whatever I do. And the amount of investable cash involved is not high enough to make a big difference in my bottom line, whatever I do.

Another thought...if SS benefits are cut (or completely disappear), perhaps overfunding the later rungs even more (2030-2040 and perhaps beyond) is a good idea. Worst case scenario if I die first, my heirs inherit it.

What about y'all? What are your thoughts, and what are you doing?

[hudson]

What about y'all? What are your thoughts, and what are you doing?

I'm also not sure what to do with maturing CD funds. Here are my thoughts with TIPS, then nominals.
TIPS?
Overall I'm 38% TIPS; I'm planing on going to at least 50%.
I have a kaesler TIPS ladder from age 77 to 96. I probably won't add to the rungs.
I'm thinking about loading up on 10 year TIPS with low index ratios and high coupons. If I was buying today that would be 91282CML2. (https://eyebonds.info/tips/2025/tips101_2025.html)
I may also wait for auctions:
5-Year TIPS Auction: April 10, 2025 to April 17, 2025
or the 10-Year TIPS Auction: 10-Year TIPS July 17, 2025 to July 24, 2025
Suggestions?

Nominals?
Bank/CU (Credit Union) CDs seem to be paying more than brokered CDs or treasuries. I'll likely go with the highest interest deal at an NCUA/FDIC CU/bank. I favor monthly payouts.

[Kevin M]

What about y'all? What are your thoughts, and what are you doing?

I shared what I've done recently in this post in the Trading Treasuries thread; here's the first paragraph:

Today I bought some TIPS for the first time since Jan 14, the day before my Jan 15 2025 TIPS matured. Today also was my first purchase of Jan 2035s. I've been holding off on the 2035s, hoping for a yield at least as high as the auction yield of 2.24%, but today the yield got back up to 2.02% (seasonally adjusted, 1.98% NSA), which I'm happy enough with, and I got 100.2075 for my April 2025s, so more than I'd get at maturity (100). Also, the Apr 2025 price bid/ask spread was only 0.02%, and best sell price was for min qty 1 (at Schwab).

TIPS yields have been generally declining since mid Jan:



But as we see, the 10y TIPS, at about 2%, is about 20 basis points up from it's recent low of 1.8% on March 3. Also, as you (protagonist) have reminded us more than once, today's TIPS yields are quite attractive compared to recent years:



My TIPS are all in my tIRA, and I have nothing but TIPS there except for a little cash in a money market fund.

In taxable I've been rolling over maturing Treasuries to 1-2 month Tbills, although I have some nominal Treasuries maturing as far out as June 2026 (bought at about 5% yield in late April last year)--but this is a thread on TIPS.

[protagonist]

[
I may also wait for auctions:
5-Year TIPS Auction: April 10, 2025 to April 17, 2025
or the 10-Year TIPS Auction: 10-Year TIPS July 17, 2025 to July 24, 2025
Suggestions?

If you are waiting because you are hoping yields improve in the interim, by all means, wait. Otherwise, if you want to buy TIPS, whether you will do better or worse in auction vs. on the secondary market is a crapshoot. If you want to buy, just buy when you feel like it.

Nominals?

I would not buy nominals. You are accepting more real risk whereas a better real return is questionable at best, especially with the threat of increasing inflation.

[protagonist]

What about y'all? What are your thoughts, and what are you doing?

I shared what I've done recently in this post in the Trading Treasuries thread; here's the first paragraph:

Today I bought some TIPS for the first time since Jan 14, the day before my Jan 15 2025 TIPS matured. Today also was my first purchase of Jan 2035s. I've been holding off on the 2035s, hoping for a yield at least as high as the auction yield of 2.24%, but today the yield got back up to 2.02% (seasonally adjusted, 1.98% NSA), which I'm happy enough with, and I got 100.2075 for my April 2025s, so more than I'd get at maturity (100). Also, the Apr 2025 price bid/ask spread was only 0.02%, and best sell price was for min qty 1 (at Schwab).

TIPS yields have been generally declining since mid Jan:

Knowing a bit about what at least had been your objective for much of the past (increasing your average duration), I think your decision to buy now was an excellent one. 2% for 10 years is a good, solid, secure yield. The decline since January is only two months of data, and from a relative high. Who knows what the future might bring?