TIPS and Historical Breakeven Inflation Rates

The Calafia Beach Pundit has an interesting discussion on TIPS (inflation-linked bonds). What caught my eye was a nice chart of historical TIPS real (after-inflation) yields vs. Treasury nominal yields. The difference is what inflation would have to be for them to pay out the same total yield, called the “breakeven inflation rate”. If actual inflation is lower, then Treasury bonds end up paying more. If actual inflation is higher, then TIPS pay more. (I’m not really sure why the breakeven inflation rate is on a different scale.)

It’s interesting how relatively steady the breakeven inflation rate has been. The low breakeven inflation rate back in 2009 was a good time to stock up on TIPS. Today, the expected inflation is about the same as historical average but real yields are at historical lows. He concludes:

To sum up: TIPS are only attractive to an investor who believes 1) that inflation will prove to be higher than expected, and 2) that economic growth will continue to be disappointing.

I’m still holding a position in TIPS in my portfolio asset allocation. I have historically overweighted them with high real rates, and today I am slightly underweighting them due to low real rates. They’ve done their job though, helping keep me off the Pepto Bismol during these last few years.


  1. I don’t understand why you would underweight TIPS. Real rates are just as low on nominal Treasuries, except that you have protection against unexpected inflation. That seems strictly worse.

  2. Good question. That’s why I don’t hold any Treasuries, I think the flight to safety by sovereign money from large countries has made Treasury rates unreasonably low, which by extension has hurt TIPS. I could earn more in savings accounts than a short-term Treasury fund.

    I hold my nominal bonds in highly-rated municipal bonds (and diversified through Vanguard funds) and stable value funds. Just my personal preference on maintaining high quality with more reasonable yields. Well, I guess I hold some Treasuries in PIMCO 401k fund.

  3. I’m a different Andy BTW.
    I just looked this morning and real yields are negative out as far as the 10-year TIPS. That means you are basically going to get inflation (actually, CPI) minus something if you buy any of those securities. The real yield on the 1-year TIPS is -2.3%, so basically inflation has to exceed that 2.3% to not lose money on the 1-year maturities. The 5-years have a real yield of around -1.3% this morning. I just don’t see a lot of value here right now.

  4. Jonathan, do you also count i-bonds in your overall TIPS portfolio?

  5. @John – No, my I-bonds are counted as part of my emergency cash reserves. Just a personal preference, it could be part of my bond allocation. Given my dislike to selling them, they may become part of my long-term portfolio one day if I keep accumulating them.

  6. Can anyone recommend a good website that charts and keeps updated the implied-inflation values for various duration treasuries/TIPs?


Speak Your Mind