TIPS rates plunge

Monday, March 10th, 2008
Categorized as: TIPS

Because of the ongoing financial crisis, a flight to the safety of Treasury securities, and the high rate of inflation, rates on some issues of TIPS with maturities of less than five years are negative, according to Bloomberg.

Bloomberg reports today’s 5-year TIPS rate as -0.21%, 10-year as 0.91%, and 20-year as 1.62%.

The Treasury, which also reports TIPS rates, gives the 5-year as 0.01%, 10-year as 0.90%, and 20-year as 1.60%.

TIPS rates can go negative when investors are willing to pay more for a bond than they will get back from the interest payments. TIPS investors are willing to do that because they expect to earn more from the inflation component alone than they can earn by investing in traditional Treasury securities with the same term.

Because of the ongoing financial crisis and the flight to safety, prices offered for traditional Treasury securities are unusually high (and, consequently, their rates are unusually low).

The unusual situation makes Series I Savings Bonds much more attractive than 5- or 10-year TIPS, except of course for the annual purchase limits.

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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 March 11th, 2008 Ken said:

Seems like this doesn’t bode well for the new I-bond fixed rate that’ll come out on May 1st?

Our only hope about the fixed rate is that maybe the Treasury is planning to offset the new low purchase limits with decent fixed rates. Since the purchase limit is so low, there should be less concern about the cost to the Treasury or about competing with the banks. A decent fixed rate could truly help the small time savers. We’ll see if there is any of this altruism at the Treasury in May.

On March 11th, 2008 Tom Adams said:

Hi Ken – If you are a Citibank or a Goldman, the Treasury will fall all over itself showing you altruism. Free markets are what capitalism is about only in good times, apparently. In bad times the banks are happy to be welfare queens.

The I-bond fixed-base rate hasn’t ever been set below 1.0%. Looks like it may be hard for them to follow that standard this time, however.

On the other hand, maybe this morning’s Fed Announcement will solve all the problems and set the financial world aright again. Here’s a better solution; if we’re going to have free markets in good times, we need to have them in bad times, too.

A financial system that privatizes gains but socializes losses is seriously flawed.Nouriel Roubini

Tom Adams

On March 11th, 2008 danny pierce said:

Any guess as to what the next inflation compontnet may be?

On March 12th, 2008 Tom Adams said:

Danny – the February CPI will be announced Friday – see my update then on my Inflation Update page.

Tom Adams

On March 14th, 2008 Mike McCune said:

Tom, Who is John Galt? And what does he think the next I-bond fixed rate will be?


On March 18th, 2008 Tom Adams said:

Hi Mike – I’m no John Galt – I’m in favor of both regulations and taxes when times are good and socialized losses when times are bad.

I’m just pointing out that all the John Galts got their way when times were good; but look, now that things have turned they’re are asking for and getting bailouts.

It’s hard to imagine that the next I bond fixed-rate won’t be lower than today’s 1.20%, however, it’s hard to imagine that an investment bank can become worthless in a week, too. So let me say it this way: if TIPS rates don’t rise, and that is always possible, the next I bond fixed-rate will be lower.

Tom Adams

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June 1, 2010

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Tom Adams

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