By David Enna, Tipswatch.com
Back on Jan. 23, 2014, the Treasury auctioned a new 10-year TIPS, CUSIP 912828B25, generating a real yield to maturity of 0.661% and a coupon rate of 0.625%.
That doesn’t seem exciting, but at the time this was a promising result, coming in the wake of nearly three years of aggressive quantitative easing by the Federal Reserve. The auction result of 0.661% was the highest real yield at auction for any 9- or 10-year TIPS in nearly three years.
In my preview article for the auction, I noted that real yields had slipped a bit from 2013 highs, but this new TIPS still looked attractive. At the time, however, I wasn’t a buyer. (I did buy this TIPS much later; more on that coming up.) My only TIPS purchase in 2014 came in the October reopening of the July 10-year, CUSIP 912828WU0, with a real yield of 0.601%.
So how did CUSIP 912828B25 do as an investment? Pretty well, actually, when measured against the 10-year Treasury note available at the time, with a nominal yield of 2.78%.
The new TIPS had an inflation breakeven rate of 2.12%, meaning it would outperform the nominal Treasury if inflation averaged more than 2.12% over the next 10 years. The result: Annual inflation averaged 2.8% over that decade, making CUSIP 912828B25 a winner, by a large margin of 68 basis points a year.
The Eyebonds.info summary page for this TIPS shows that it generated a nominal annual return of 3.445%, well above the nominal Treasury’s 2.78%.
The lesson here is that even a mundane real yield of 0.661% can be a good investment if inflation trends work in the investment’s favor.
Catching the inflation wave
I’ve been tracking results for 5- and 10-year TIPS for a long time. For many years, the news wasn’t great. We recently completed a decade-long period of inflation running at less than 2.0%, causing TIPS to do poorly versus nominal Treasurys. Then in 2021 we entered an era of much higher inflation, and so TIPS maturing recently have done well, getting a big boost from inflation in the last three years.
To view this chart at a glance, the annual variance number in the last column shows how the inflation breakeven rate compared to actual 10-year annual inflation. When the numbers are green, a TIPS was the superior investment. When they are red, the nominal Treasury was the better investment.
The next decade could be entirely different. Never predict the future decade based on the performance of the past decade.
My later purchase of CUSIP 912828B25
Because I was getting a lot of questions about the lavishly high real yields you often see on short-term TIPS, I decided to do a 4 1/2-month experiment to see how CUSIP 912828B25 would perform versus a 17-week Treasury. You can read the details here: “Experiment: Let’s try out a very short-term TIPS“.
I will be posting an article Wednesday morning revealing the result of the experiment. Here is the link.
Notes and qualifications
My TIPS vs. Nominals chart is an estimate of performance.
Keep in mind that interest on a nominal Treasury and the TIPS coupon rate is paid out as current-year income and not reinvested. So in the case of a nominal Treasury, the interest earned could be reinvested elsewhere, which would potentially boost the gain. For certain, we don’t know what the investor could have earned precisely on an investment after re-investments.
In the case of a TIPS, the inflation adjustment compounds over time, and that will give TIPS a slight boost in return that isn’t reflected in the “average inflation” numbers presented in the chart.
• Confused by TIPS? Read my Q&A on TIPS
• TIPS in depth: Understand the language
• TIPS on the secondary market: Things to consider
• Upcoming schedule of TIPS auctions
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Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear.Please stay on topic and avoid political tirades.
David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
Treasury Inflation-Protected Securities 
As someone new to TIPS, I’m grateful for the summaries over time to get a better perspective on these investments. It seems that the Actual YTM vs Real YTM is a useful measure. Was Actual YTM calculated in your 10-year TIPS decade chart? Where can I find that measure in a 10-year and 5-year TIPS decade summary chart? Can Actual YTM be included in future summaries if not already noted? Thanks for the logical sequential stimulation in retirement, David.
Eyebonds.info is a great resource for this Actual YTM, which equates to the nominal yield. It is only listed on that site after the TIPS matures and all the information is finalized. Here is the list of all TIPS ever issued: http://eyebonds.info/tips/tipslist_mat.html
In my chart, you can get a fairly accurate estimate of the actual YTM by adding 10-year real yield of the TIPS at auction + the 10-year annual inflation rate. So for this Jan 15 TIPS it was 0.661% + 2.8% = 3.461%, pretty close to the Eyebonds.info number.
Very helpful. Thank you, David.
I have a question about measuring the performance of TIPS. My broker adjusts the cost basis of the TIPS in my IRA according to the IRS guidelines for TIPS in taxable accounts. This results in the account statement showing losses, or minimal gains, in TIPS that have done very well over time. For example, one position has gained thousands in adjusted principal over time, but shows either a loss or a small gain in my brokerage statement. This is because the “cost basis” is artificially increased by the broker as if taxes had been paid over time. They have a “one size fits all” approach to calculating cost basis that doesn’t distinguish between TIPS held in IRAs vs taxable accounts. Have you had this problem, and is there any way to make the gain shown on the statement more accurate? Or am I missing something?
Vanguard also has an “unusual” way of recording inflation accruals as additional shares in my traditional IRA. In Quicken, I get notices of additional shares (or fewer in times of deflation) and I let Quicken do the adjustments. Maybe this is the only realistic way to do it in a brokerage account. Plus you have the “mark-to-market” issue, which might be irrelevant if you are holding to maturity, but is necessary to determine RMDs from the account if you are subject to RMDs. … I have always kept an Excel spreadsheet of all my TIPS listed by maturity date and showing par value, inflation index and current principal. That is more helpful since I am holding to maturity.
Very interesting, thanks for posting. Just out of curiosity, I added up the annual variances for the red and green numbers, and the green (TIPS) was a total of 4.27 over 9 years, or an average of .47 per year, while the red (nominals) was a total of 6.56 over 13 years, or an average of .50 per year. So the spread on each was basically the same over that 10-year time frame. Does that mean anything?
I’d say “probably not.” But it does tell you that inflation expectations are often wrong. We can only tell after the fact how accurate they were and being off by 1/2 percentage point in either direction isn’t very accurate. What works in the favor of TIPS is that the investment insures against suddenly high inflation, but sometimes that insurance isn’t needed.
In a sense, the cost of this “insurance” was three basis points, which is pretty reasonable.