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The next 5-Year TIPS auction is this week The expected interest rate or coupon is 2.375%.  That is a guaranteed rate of 2.375% over inflation. The auction closes on October 19th.  If you haven’t been watching TIPS, that is the highest interest rate since 2006!

Treasury Inflation-Protected Securities

TIPS, or Treasury Inflation-Protected Securities, are marketable Treasury securities whose principal amount is adjusted for inflation. They offer you a way to protect your purchasing power and hedge against inflation risk. They also help the government finance its debt at a lower cost.   See this blog post TIPS the magic Inflation Killer – MoneyMavenBlog.com

5-Year TIPS History

Fidelity has published the expected coupon or interest rate as 2.375%. 

If the interest rate determined at auction turns out to be 2.375% that will be the highest it has been in quite some time. I went to treasurydirect.gov and downloaded the data from prior 5-year TIPS auctions.

Historical data 5 year TIPS showing last time interest rate was as high as 2.375% was April 2006
5 Year TIPs Auction Data source: treasurydirect.gov

As you can see from the data above, the last time a 5-year TIPS had a 2.375% interest rate at auction was in April of 2006.

What is Your Inflation Outlook

The TIPS yield at auction is lower than the Treasury bond yield. Your actual yield over time changes for TIPS as the the bond principal adjusts based on inflation. Whether you will receive a higher yield with TIPS or Treasury bonds depends on future inflation. TIPS can help you fight inflation.

Most investors use something called the breakeven point to evaluate TIPS bonds.  The breakeven point can be calculated by subtracting the real yield of a TIPS bond from the nominal yield of a Treasury bond with the same maturity.

For example, according to Fidelity, the expected real yield on the October 19 5-Year TIPS auction is 2.22%. 

This Fixed Income & Bond table from Fidelity shows the 5 Year Treasury yield as

Fixed Income & Bond Yields Table from Fidelity.com Shows the 5 Year US Treasury 4.67%

 4.67% – 2.22% = 2.45% breakeven point

If you expect inflation to be higher than the 2.45% breakeven point, you would purchase the TIPS.  If inflation is higher than the breakeven point, you would receive a higher return from the TIPS rather than the Treasury bonds.

If you expect inflation to be lower than the 2.45% breakeven point, you would purchase the Treasury bonds.  If inflation is lower than the breakeven point, you would receive a higher return from the Treasury bonds rather than the TIPS bonds.

Since yields change frequently, the breakeven rate changes as well.  Our example above used data from Saturday, October 14.

The Federal Reserve website FRED also publishes the breakeven point.  The numbers will likely be slightly different because yields are constantly changing. 

5-Year Breakeven Inflation Rate (T5YIE) | FRED | St. Louis Fed (stlouisfed.org)

Do You Plan to Partake in the Auction?

Do you plan to buy 5-year TIPS at the auction next week? If so, don’t forget the auction closes in the morning so it is best to get your order in early.  Enter your order at the latest the day prior to the auction date.  5-year TIPS can be a useful tool to protect your purchasing power and minimize inflation risk. However, they also entail some risks, such as liquidity risk, deflation risk, and tax risk, that need to be considered carefully before investing Share your thoughts and opinions in the comments section below!

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