Inflation Protection Is Getting More Expensive - Is It Worth It?

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  • TIPS yields have fallen much more sharply than the overall Treasury market.
  • The five-year TIPS yield has fallen into a negative number, again.
  • While TIPS remain inexpensive versus Treasurys, the yields today aren't appealing.

Back on Jan. 21, I bought a new 10-year Treasury Inflation-Protected Security at auction with a real yield (after inflation) of 0.725%, highest in nearly five years.

Now, four months later, that same TIPS is trading on the secondary market with a yield of 0.20%, a whopping 52 basis points lower. While I paid about $98.95 for $100 of value at auction - because of the TIPS' coupon rate of 0.625% - buyers today would be paying about $104.01. That's about 5% higher.

TIPS have gotten a lot more expensive in the last four months. Why? There are two basic reasons:

Reason 1. TIPS are following the overall trend of declining Treasury yields. If you look back to January 21, a nominal 10-year Treasury was yielding 2.03%. Today, it is yielding 1.79%, a drop of 24 basis points.

And if you look at the yields being paid around the world for government debt, you can see why money would be flowing into U.S. Treasurys, which remain among the world's safest investments. For example:

  • In Switzerland, a 10-year government bond is yielding -0.37%.
  • In Japan, -0.09%.
  • In Germany, 0.17%.
  • In the Netherlands, 0.39%.
  • In France, 0.52%
  • In Italy, 1.38%.
  • In the United Kingdom, 1.43%.
  • In Spain, 1.53%.
  • In South Korea, 1.78%.

It is going to be difficult for Treasury yields to rise significantly when rates are being held at extremely low levels by government intervention across the globe.

Reason 2. Investors are beginning to price in rising inflation, making TIPS more expensive against nominal Treasurys. You can see this by looking at the inflation breakeven rate, which compares a TIPS yield against a nominal Treasury.

On Jan. 21, that TIPS I bought at auction had an ultra-low inflation breakeven rate of 1.30%. A few weeks later, on February 11, the 10-year inflation breakeven rate dropped

This article was written by

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I am no longer writing for this site. More details. I will continue to post updates at my site, Enna is a long-time journalist based in Charlotte, N.C. A past recipient of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website. The Tipswatch blog, which launched in April 2011, explores ideas, benefits and cautions about U.S. Series I Bonds and Treasury Inflation-Protected Securities, which David believes are an under-appreciated and under-used investments. David has been investing in TIPS and I Bonds since 1998.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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