bond investor

TIPS: Nominal Yield, Risky Real After-Tax Return

It isn't just the tax rate for TIPS, it's the timing of the tax payments and the liquidity and transaction costs of meeting them with internal cash flows. Just Google "TIPS phantom income." Taxable investors get principal added to their investment, to be paid at maturity, but the IRS taxes it in each tax year. Funding that tax payment from cash flows would require selling a sliver of your TIPS investment. That reduces the number of "uninformed" retail investors, and it also creates distortions in the big TIPS mutual funds, which are also trying to smooth their yields across months.