30 year TIPS has highest yield in 24 years

Investment Analysis Clubs Macro Economic Trends and Risks
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The safest investment currently available is the Treasury Inflation Protected Security (TIPS). TIPS may be bought in any quantity (unlike I-Series Savings Bonds which are limited to $10,000 per year).

https://www.investopedia.com/terms/t/tips.asp

There are two risks that are new: the risk that the U.S. will default on interest payment and the risk that the BLS will understate the actual inflation rate under pressure from the executive branch.

Barring these risks, TIPS are an investment for those who want to minimize risk. The TIPS will yield higher than the Treasury of the same maturity if future inflation is higher than the breakeven rate.

30-year TIPS reopening gets real yield of 2.650%, highest in nearly 24 years

Posted on August 21, 2025 by Tipswatch

By David Enna, Tipswatch.com

Investors were ready and willing to jump aboard today’s auction of a reopened 30-year Treasury Inflation-Protected Security, CUSIP 912810UH9. And why not? The resulting real yield to maturity of 2.650% was the highest for this term at auction since October 2001.

This TIPS will mature February 15, 2055. It has a coupon rate of 2.375%, which was set by the originating auction on February 20, 2025….

Inflation breakeven rate

The 30-year Treasury bond was trading with a nominal yield of 4.92% at the auction’s close, so this TIPS gets an inflation breakeven rate of 2.27%, in line with recent auction results. This means it will outperform the nominal bond if inflation averages more than 2.27% over the next 29 years, 6 months.

Some perspective: Look at 30-year inflation averages over the last 55 years. Only one 30-year period (ending in 2020) had average inflation of 2.2%. Every other one was higher.

For today’s buyers, I just want to point out that just four years ago this same term and same auction size got a real yield of -0.292%. Today’s result was a whopping 294 basis points higher.….[end quote]

Like all bonds, the yield is based on both the coupon and the price paid for the bond. TIPS can be bought from Treasury Direct but it’s more convenient to buy on the secondary market from Fidelity since there is a wider choice of maturities.

The financial press writes a lot about the fed funds rate so investors pay a lot of attention to it. But the fed funds rate is an overnight rate. The bond market sets the longer-term bond rates by auction. Demand was strong for this 30 year TIPS so the high yield isn’t due to lack of bids. The bond market is demanding a higher real yield now.

What does this say about the long-term prospects for the economy and the federal deficit?

I didn’t buy this bond because I don’t expect to be alive in 30 years. The bond can be sold on the secondary market but I generally hold bonds to maturity.

The longer the duration of the bond the more the bond’s price will swing if sold before maturity. A general rule of thumb, based on the concept of duration, is that for every 1% increase in interest rates, a bond’s price will fall by a percentage roughly equal to its duration. Since a 30-year bond typically has a duration close to 15-20 years (depending on its coupon rate), its value would likely drop by about 15% to 20% if interest rates rise by 1%. Conversely, the value of the bond will rise if interest rates fall. The TIPS I bought in October 2008 (which yielded 3% based on the depressed crisis price) rose sharply in value once the crisis was over.

This is the longest bond I own. Will I make it to 2041? Time will tell.

Wendy

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In response to a question from my big brother, @OrmontUS, I generated a spreadsheet.

Jeff, in response to yesterday’s conversation I set up a spreadsheet showing the effects of the coupon yield and inflation on taxable income.

TIPS are adjusted for inflation. The principal of the bond is multiplied by the inflation rate. This adjustment is then added to the principal. The adjustment is taxable each year even though it is not added to cash flow. (It’s similar to the interest from a CD which is taxed every year even though you don’t get it until the CD matures.) This is sometimes called “phantom income” because it’s taxable but not added to cash flow.

The interest income is the coupon rate multiplied by the principal. Since the principal grows at the rate of inflation the coupon interest grows every year even though the coupon percent stays the same.

If the coupon rate is low and inflation is high the phantom income can be higher than the coupon interest income. The worst situation is a low coupon rate and a high inflation rate. “Total” includes the growing principal and taxable income minus tax.

Year	Principal	Coupon	Inflation	Coupon income	Phantom Income	Taxable Income	Tax rate	Tax	Cash flow	Total
1	$1,000.00	0.625%	2.00%	        $6.25	        $20.00	        $26.25	        25%	        $6.56	-$0.31	        $1,019.69
2	$1,020.00	0.625%	2.00%	        $6.38	        $20.40	        $26.78	        25%	        $6.69	-$0.32	        $1,040.08
3	$1,040.40	0.625%	2.00%	        $6.50	        $20.81	        $27.31	        25%	        $6.83	-$0.33	        $1,060.88
										
										
Year	Principal	Coupon	Inflation	Coupon income	Phantom Income	Taxable Income	Tax rate	Tax	Cash flow	Total
1	$1,000.00	0.625%	10.00%	        $6.25	        $100.00	        $106.25	        25%	       $26.56	-$20.31	        $1,079.69
2	$1,100.00	0.625%	10.00%	        $6.88	        $110.00	        $116.88	        25%	       $29.22	-$22.34	        $1,187.66
3	$1,210.00	0.625%	10.00%	        $7.56	        $121.00	        $128.56	        25%	       $32.14	-$24.58	        $1,306.42
										
Year	Principal	Coupon	Inflation	Coupon income	Phantom Income	Taxable Income	Tax rate	Tax	Cash flow	Total
1	1000	        2.650%	2.00%	        $26.50	        $20.00	        $46.50	        25%	        $11.63	$14.88	        $1,034.88
2	1020	        2.650%	2.00%	        $27.03	        $20.40	        $47.43	        25%	        $11.86	$15.17	        $1,055.57
3	1040.4	        2.650%	2.00%	        $27.57	        $20.81	        $48.38	        25%	        $12.09	$15.48	        $1,076.68
										
										
Year	Principal	Coupon	Inflation	Coupon income	Phantom Income	Taxable Income	Tax rate	Tax	Cash flow	Total
1	1000	        2.650%	10.00%	        $26.50	        $100.00	        $126.50	        25%	        $31.63	-$5.13	       $1,094.88
2	1100	        2.650%	10.00%	        $29.15	        $110.00	        $139.15	        25%	        $34.79	-$5.64	       $1,204.36
3	1210	        2.650%	10.00%	        $32.07	        $121.00	        $153.07	        25%	        $38.27	-$6.20	       $1,324.80

Like any other bond, a TIPS may be held to maturity to receive the full (inflated) principal. Or it may be sold on the secondary market before maturity. If prevailing interest rates fall the TIPS will sell for more. If prevailing interest rates rise the TIPS will sell for less. The longer the duration the larger the swing.

Generally, the Federal Reserve controls only the overnight fed funds rate and not the long-term yields which are set by the bond market. However, the Fed can and has bought massive amounts of long-term Treasuries, mortgage bonds and even corporate bonds in the past and they could again.

https://fred.stlouisfed.org/series/WALCL

This chart shows QE during the 2008 financial crisis and the Covid crisis. But there was also a significant amount of buying in 2012 - 2014 (QE3) to stimulate the economy which was still slow during the “Great Recession.” This shows that the Fed might be influenced to suppress long-term interest rates in case of recession – or even if the White House declares a bogus “emergency” as Trump has done several times already.

On the other hand, inflation is a real threat due to massive government deficits coupled with removal of a significant part of the work force. The bond market will continue to raise long-term yields as long as this threat persists. That would depress the value of all existing bonds, including TIPS.

Wendy