TIPS rates jump to levels not seen for six years

Wednesday, October 29th, 2008
Categorized as: TIPS

Since early October, TIPS rates have jumped. On Oct. 3 the 5-year rate was 1.68% and the 10-year rate was 2.18%. As of yesterday, the equivalent rates were 3.79% (up 2.11 percentage points) and 3.06% (up 0.88 points).

The reason rates have jumped is that TIPS investors expect to see inflation reverse. When the CPI goes down, the principal value of TIPS declines as well. Investors are demanding a higher interest rate to cover the risk of price deflation.

Fortunately, there is a major difference between Series I Savings Bonds and TIPS in terms of how inflation is used to adjust the value of the security.

With TIPS the adjusted principal is used to calculate the amount of interest earned by the coupon rate of the security. The adjusted principal can go below par value for the purpose of calculating interest, however, when the security matures, TIPS investors get back the higher of the par value of the bond or the adjusted principal.

With I bonds the inflation/deflation rate is added to/subtracted from the fixed rate paid by the security. Since the combined rate can’t be less than zero, neither the principal value used for calculating interest nor the redemption value of the bond can go down. During deflation, I bonds are a much better investment than TIPS.

The rate on 5-year TIPS is now above the rate on 5-year Treasury Notes (2.75% yesterday).

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:


On October 29th, 2008 Robert Ranlett said:

Question on TIPS: The inflation adjustment of principal on TIPS bonds is counted as taxable income. What would happen if the inflation adjustment was negative for the year – would it count as a capital loss? Thanks

On October 30th, 2008 Tom Adams said:

Hi Robert – You are correct, the Treasury reports TIPS principal adjustments to you and the IRS on a form called a 1099-OID.

However, the amounts reported on this form are considered to be interest, not capital gains. You add the number on this form to your other interest income. If the inflation adjustment was negative, then you’d have a reduction in income.

Tom Adams

On October 31st, 2008 Dan said:

To follow Robert’s question with another…

Let’s say an investor buys a TIPS bond for $1000. Let’s say year 2008 ends with net deflation, and the inflation-adjusted principal is $950 by Dec 31st. As Tom said in the response above, so far this is just a reduction in income and doesn’t count as a capital loss.

Now, what if in the following year, inflation brings the principal back to $1000 exactly. Must the 2009 tax return report the $50 as earned interest, even though the investor has no net gains since the original purchase?

On October 31st, 2008 jdj said:

Hey Tom,

Wouldn’t these hight TIPs rates bode well for a bump up in the fixed rate for I-bonds?

On November 3rd, 2008 Tom Adams said:

Dan – That’s the way I understand it. The Treasury will report a $50 loss the first year to you and the IRS and a $50 gain the following year.

JDJ – Good call! But they only bumped it up to 0.70% – 2.00% would have been fair based on how they used to set it.

Tom Adams

On February 8th, 2009 Miles Behrend said:

What is the relationship between owning TIPS vs a TIP fund?

On February 9th, 2009 Tom Adams said:

Miles – You can invest in TIPS using TreasuryDirect without any fees, but they’re only offered a few days during the year. A stock broker can also help you invest in previously-issued TIPS, but the transactions aren’t transparent and its easy for small investors to pay too much.

If you own a TIPS fund you’re basically paying a fee to have the professionals at the fund deal with the stock brokers and to manage the transactions for you. But you need to read the prospectus of each individual fund to determine exactly how much of your money is invested in TIPS and how much can be invested in other stuff. The prospectus also has the details of the fees you will be charged.

Tom Adams

On September 23rd, 2009 Rick said:

Hi Tom. If I purchased TIPS from Treasury Direct but I opted to sell them in the secondary market through Treasury Direct before they matured, Treasury Direct will charge a fee for this service. But just how much could I expect to get back minus the service fee using this transaction?

On September 24th, 2009 Tom Adams said:

Rick – The “redemption value” of TIPS changes every day based on two things – the underlying inflation-adjusted value of the bond and today’s market-based interest rates.

The Treasury actually publishes index numbers each month (here’s the most recent) that are used to calculate the underlying value of each individual TIPS issue. This is the value that interest is calculated with, using the “coupon rate” of the bond. That’s the interest rate that you see in the description of the bond.

But if your coupon rate is 3% and in the open market the rate for that maturity of TIPS is 2%, people would rather have your 3% bond than a 2% bond, and they’ll pay more for it. Likewise, if yours has a 1% coupon and the market rate is 2%, they’ll pay less for it.

So the answer to your question is basically that it’s hard to say what you’d get back. It depends on both the rate and direction of inflation after you invest, and the direction of interest rates. There is no way I know of for the general public to look up trading prices of bonds, even though stock quotes are everywhere. (If any readers know of a source for bond prices, please leave a link in a comment).

Tom Adams

On December 18th, 2009 Suhail said:


I use Bloomberg to get quoted on Bond rates & to check the yield curve.

On December 22nd, 2009 Tom Adams said:

Suhail – that link is much better than nothing at all, but I was really looking for something that listed each individual issue of TIPS by CUSIP number and gave the current bid/ask prices.

That level of detail can be found for stocks in thousands of places. Why not for bonds?

Tom Adams

On December 22nd, 2009 Suhail said:


I was able to get bid/ask for TIPs securities from the WSJ site. Here’s a link.


On December 23rd, 2009 Tom Adams said:

Suhail – yes, that’s what I was looking for! So back to Rick’s question, you can use Suhail’s link to see what you might get for your TIPS today. Bond prices have funny quotes – they look like they’re around $100, but the bonds actually sell in $1,000 units, so you have to move the decimal point in the price one place to the right to see what you’d get.

In general, you paid about $1,000 for each $1,000 TIPS, although it’s never exactly $1,000 – could be a little more or a little less.

Tom Adams

Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on I will contine to update the main articles on this site, but not the comments.

Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

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