Julian Van Erlach

TIPS: Nominal Yield, Risky Real After-Tax Return

Dear Jim - good thoughts. Consider that if untaxed investors were the marginal pricers e.g. charities, foundations - then the current 10 year TIPS yield of just above 2% would be a REAL yield; thus reflecting the required real no tax/after-tax yield. Then the nominal bond should be priced with the same 2% real after-tax yield. However, the real nominal bond after-tax yield based on implied expected inflation is just .5%. This seems to indicate the marginal pricer of both TIPS and nominal bonds is factoring taxation.