Treasury and TIPS discussion thread

Yields on long term treasuries and TIPS have surged recently.

10yr 4.79%
20yr 5.15%

20yr 2.6%
25yr 2.6%

For TIPS, the 2.6% is the real return, i.e. the return above the inflation rate.

I bought an individual TIPS bond for the first time this morning. The one I bought was 912810RA8 with a circa 2043 maturity. When I bought it, the YTM was 2.55% but it has now increased to 2.6% at the time of this post.


Nominal treasury yields:
Resource Center | U.S. Department of the Treasury
TIPS yields:
Resource Center | U.S. Department of the Treasury

It’s a hard product to figure out, since your purchase not only includes the bond price, but also the inflation factor adjustment. But that factor is based on the current price, meaning the extra $234 you pay now will be $333 at maturity. Lots of moving parts in that yield calculation.

With a Fed inflation target of 2%, I dont know if I like locking money up for 20+ years for what would be a sub-5% APY.

Agreed. It is a bit confusing. I will need to do more homework before I buy.

You can look at this as a feature not a bug. “Target” is not as a reassuring word as it was a few years ago. TIPS (and I Bonds) give insurance for when the target is missed as it has been missed for years.

That said I am not locking in yet. I love the short end of the curve still. I also love listening to the finance people tell me that there will be a rate cut in 6 months. I think I have heard that for about a year?

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For TIPS, the real yield (not the nominal yield) is usually included in the price quote. Historically a 2.5% real yield is quite attractive.

Yes, I’m just thinking that over 20-25 years, it’s going to average out towards that target a lot more than it would over any given 3-5 year period. And I dont see that target moving any, no matter how much they keep over- and under-shooting it.

Relative to historical TIPS yields, sure. But for a targeted long term average rate of under 5%, 25 years is a long commitment. 2 years ago I Bonds were the rage, now CD rates continue to rise while inflation has dropped. And unlike I Bonds, there is no pre-defined early “out”, you can lose a (relative) ton bailing early.

The TIPS you bought already has 25% of the value in the inflation adjustment, and that portion doesnt earn the coupon rate. From what I can tell, that adjustment money isnt included in the YTM calculation. With the .625% coupon rate of your bond it doesnt really matter, but I’m trying to appreciate at what rate it does matter and how much it can matter to the total return.

I’m not saying the TIPS are bad, I want to like them and buy some myself (I spent this afternoon figuring out what all the numbers mean and what all goes in to calculating that yield). I’m just having trouble wrapping my head around the whole thing. Help get me over the hump! I’d love to dump cash into them and not have to think about it again for another 25 years.


Please review this post on Schwab on how the coupon payment is determined


Depending on which inflation measure you use, inflation is about 3%.

That means that a six month T-bill, which is yielding about 5.5%, has a real yield of about 2.5%.

This is, of course, before income tax, but the TIPS interest and inflation adjustment is also taxable.


It was a coincidence that this one popped at the top of the yield chart, but I bought some of the same issue this afternoon at a 2.52% YTM. Needed a new home for some redeemed I bond money; I dont think it’s going to get much better than a 2.5% yield, and I dont think the new I bond fixed rate will come close.

Is the inflation adjustment taxed each year along with the interest? Or is that portion of gain deferred until sold/maturity?

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The inflation adjustment is taxed each year unfortunately.

The following is my understanding:

The (real) coupon yield of this bond is 0.625%. Since the market real yield is now ~2.6%, the bond you bought is sold at a discount. The return of this bond at maturity will come from

a) the bond appreciation, as it approaches the par value ($100 in real dollars) at maturity
b) coupon payments
c) inflation adjustment (the increase in inflation factor)

b) and c) are taxed each year, while a) is deferred until the bond is sold / maturity.

I know a) could be confusing. But it is similar to the appreciation of a discounted nominal bond that you buy now. The bond 912810RA8 that you bought currently has a discounted value of around $70 (although you paid $70 x inflation factor of ~1.33).

Because of b) and for maximum tax deferral, I am favoring bonds with low coupons. If you need the cash flow, bonds with higher coupons could be suitable.

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For sure. I was just unsure if the inflation adjustment accrued like the discount to par, to be taxed at maturity. I didnt think so, since it’d mean paying tax on prior inflation adjustments that someone else received.

Another thing I’m unsure of is if inflation adjustments compound, or are just calculated on the par value - with a 1.33 inflation factor, would a year of 4% inflation increase it 1.33 x 4% = 1.383, or (1 x 4%) + 1.33 = 1.37? That could be a significant difference over 20 years.

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Don’t quite understand the first question, but I think it is somewhat related to your second question. The treasury apparently publishes the index ratio every day. The index ratio comes from the CPI, so yes, this would mean that the inflation adjustments compound (since the CPI compounds). Take a look at the following

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You already answered it about the annual inflation adjustment being taxed each year.

So if inflation the next 12 months is 4%, the inflation factor will go up 4% of 1.33? Or is it 4% of 1 (the bond’s par value), then added to the .33 that’s accrued thusfar?

Would you buy the 20 year nominal at 5.15% ? At what interest rate would you buy?

I dont think there is a right answer right now.

Like I said earlier, the inflation factor compounds since it is linked directly to the CPI. So it will go up to 1.04 x 1.33 in your example.

Another example:
Day 1 (bond issued) CPI=300, Inflation index=1.00
Day 500 CPI=330, inflation index=1.10
Day 800 CPI=396, inflation index=1.32

I strongly encourage you to review the link I posted in my last post.


Glad to see a discussion here on these. Investors in this security are buying at a good time IMO, and won’t regret it as part of a diversified portfolio.


Let’s check my understanding:

I’m seeing a 2/2051 TIP for 54.677, and an inflation adjusted price of 64.344, and coupon rate of .125%.

Worst case, defaltion could completely decimate the inflation adjustment. Even if that were to occur, there is a guaranteed gain for this bond of approx 57% over 27 years - 64.34 purchase price and 100.00 minimum maturity value. Plus $1.25 in interest payments each year.

The main difference between this and an I bond is that for this TIP, inflation is calculated for the full holding period to determine the adjustment - it may be calculated daily, but doesnt accrue until maturity. While for an I bond, inflation is calculated and accrued in 6-month blocks, with future blocks having no effect on what was earned in prior blocks (tomorrow’s deflation losses will not be applied against today’s inflation gains).

The other main difference is that the I bond has a pretty defined exit cost, if sold/redeemed prior to maturity. While the TIP’s exit cost is entirely undefined and subject to market conditions unless held to maturity.


David Enna on the 5 year TIPS auction on Oct 19,

As of Friday’s market close, the Treasury was estimating the real yield of a 5-year TIPS at 2.39%, down 21 basis points from a week earlier. Treasury yields have been sliding lower based on a combination of more dovish comments by Federal Reserve officials, and a flight to safety in the wake of turmoil in the Mideast.

A related issue is that with tips held in a taxable account you need to pay taxes on the annual interest and OID adjustment. I bonds are only taxed when you sell them.

Another difference is that there is no secondary market for ibonds. If interest rates drop, the principal value of TIPS will increase, but the value of ibonds stays the same. Of course, this only matters if you sell the TIPS.