Some consider this as a great opportunity. I don’t understand TIPS. There were past discussion about TIPS here. Someone with more knowledge, perhaps @WendyBG, can chime in.
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@Kingran I have invested in TIPS since 2008. I noticed the 30 year TIPS yield. I was just discussing it with Gemini because it’s a record high.
In fact, I had the chart open when I saw your post.
TIPS pay the investor in two ways.
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They pay a coupon every six months. For example (listed on the secondary market at Fidelity) CUSIP 912810TY4 , United States Treas Bds 2.12500% 02/15/2054 is a TIPS that will pay $21.21 per $1,000 bond annually, split between February and August. The Ask Yield is 2.954%. Because this is above the coupon yield, the Ask Price is $84.440. Bond prices drop when yields rise. Remember this for later.
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Because this is a TIPS bond, the principal will be adjusted upward with the CPI-U. The coupon will be paid on the inflated principal so the actual interest will be higher than the coupon interest of the bond.
| Inflation information |
|---|
| Dated date reference CPI |
Daily reference CPI| 334.51245 |
Inflation factor| 1.08996 | |
| Historical inflation factor | 1.08974 |
Inflation adjusted price| 92.03622 |
- The increase in the principal is taxed as ordinary income every year. But that increase in principal is only paid to you when the bond matures (or if you sell the bond before maturity). So you will be taxed on income you don’t actually have - this is called “phantom income.” It’s similar to being taxed on a CD’s interest every year even though you can’t spend the interest until the CD matures. A TIPS buyer has to be careful. Some of the TIPS issued in the QE repression years of 2020-2021 have very low coupon rates (0.125%). The taxation on the phantom interest (from inflation increasing the principal) can be higher than the coupon, producing negative cash flow. This isn’t a problem if the TIPS is held in an IRA.
It’s important to realize that bonds that are held to maturity will return the entire value. But TIPS values, like all other bonds, fluctuate with prevailing interest rates if sold before maturity.
The longer the duration of the bond, the more the value will fluctuate. Long-duration bonds can lose a lot of value if interest rates rise.
https://www.investopedia.com/articles/bonds/09/bond-market-interest-rates.asp
As investors, we have to ask: will interest rates rise over the next 30 years – aside from inflation? (Because these are TIPS.)
I pointed out to Gemini that the 30 year TIPS is at a record but I think it’s too risky for me.
Gemini answered:
Why Are Long Real Yields Rising? (The Fiscal Supply Shock)
If inflation expectations (breakevens) are relatively anchored around ~2.1%–2.3%, but long TIPS yields are surging, it means the bond market is demanding a higher real term premium. This isn’t driven by growth optimism; it’s driven by debt issuance realities:
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Massive Treasury Supply: The U.S. government is running high structural fiscal deficits, requiring continuous issuance of massive volumes of debt.
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Fewer Price-Insensitive Buyers: With the Federal Reserve conducting quantitative tightening (or keeping its balance sheet constrained) and foreign central banks slowing their purchases of U.S. debt, the private market must step in to absorb this supply.
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Demanding Higher Real Compensation: To entice domestic and global investors to tie up capital for 30 years in U.S. debt, the market is forcing the Treasury to offer historically high real interest rates.
The Long-Term Tailwind (Debt Service Trap): As real yields rise on a massive national debt stack, the interest expense on the U.S. federal budget surges exponentially. Foreign central banks recognize that high real borrowing costs on a growing debt load eventually force central banks into monetary accommodation or debt monetization down the road. [“Debt monetization” is jargon for the Federal Reserve buying the bonds with fiat dollars out of thin air – QE – suppressing yields like they did in 2008 and 2020.]
Your assessment hits the nail on the head regarding duration risk and supply dynamics. On paper, locking in a ~2.9% real return above inflation for 30 years sounds like a classic, generational entry point—especially for an asset with zero credit risk.
However, buying a 30-year paper asset when the structural market mechanics are actively working against duration turns a “high real yield” into a dangerous duration trap.
Here is why your caution on the 30-year TIPS is entirely justified right now:
1. The Fiscal Supply Tsunami (The Supply/Demand Mismatch)
Even with an attractive real coupon, the sheer volume of Treasury issuance required to fund exploding structural deficits means supply is relentlessly swamping organic demand.
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No Price-Insensitive Buyer: In past cycles, massive deficit issuance was absorbed by the Fed (QE) or foreign central banks. Today, foreign central banks are diversifying into physical assets [such as gold], leaving price-sensitive private capital to absorb the flood.
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The Term Premium Penalty: To force the market to digest endless 30-year auctions, investors keep demanding a higher “term premium.” That means yields can easily continue to reprice higher—and bond prices lower—regardless of how high the real yield already looks.
2. The “Warsh Factor” and Balance Sheet Shrinkage (QT)
Fed Chair Kevin Warsh’s explicit goal to shrink the Fed’s balance sheet removes the ultimate liquidity backstop for long-duration paper:
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Removing the Bid: When the Fed actively sheds its huge book or refuses to step in as the buyer of last resort at the long end, the long end of the curve is forced to find its own market-clearing price.
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Structural Steepening: Active balance sheet reduction pushes long-term real yields up faster than short-term rates. Holding a 30-year duration instrument while the central bank is actively unwinding its balance sheet subjects you to severe price volatility (convexity risk).
3. Duration Risk vs. Real Yield Capture
A 30-year TIPS has a massive modified duration (often around 18–20 years). That means even a modest 50 basis point further increase in long real yields—say, from 2.9% up to 3.4%—causes a ~10% drop in principal market value.
The Tactical Alternative: Curve Positioning
If the goal is to capture historically high real yields without taking on catastrophic duration risk from federal deficits and Fed balance sheet runoff, the market is currently offering much better risk-adjusted options further down the curve:
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Short-to-Intermediate TIPS (5-Year to 10-Year): The 5-year to 10-year TIPS segment offers robust real yields (well above 2%) with a fraction of the duration risk. You capture the real inflation-protected yield while insulated from the supply-driven repricing happening at the 30-year mark.
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Defined-Maturity Ladders: Holding shorter-to-intermediate individual TIPS or Treasuries to maturity completely eliminates mark-to-market risk, allowing you to harvest the high real income without worrying about where the 30-year yield clears.
Bottom Line: You are completely right to walk away from the 30-year TIPS here. A 2.9% real yield is historically tempting, but standing in front of an exploding supply curve and a Fed shedding its balance sheet makes 30-year duration an unnecessary gamble when you can lock in great real yields much safer on the shorter end. [end Gemini quote]
Is a 3% TIPS a great opportunity? Maybe.
It depends upon whether interest rates will hold steady or fall between now and when the bond matures (or you sell it before maturity). I bought TIPS yielding 3% in 2008. Interest rates fell after that so it was a good move.
But the situation is different now. I think that interest rates are likely to rise so I won’t be buying 30 year bonds though I might ladder TIPS up to 5 years as an alternative to holding cash in a money market.
Wendy
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Thanks for sharing your views. It sound complicated. I guess I will stick with $TLT and options on that… 
I just looked at a chart and it appears that it traded higher in 2002 or thereabouts. In fact, it may have been higher from inception through 2002.
I own a few CDs that actually distribute their interest monthly, quarterly (maybe?), or semi-annually. Do CDs really make phantom distributions like TIPS do???
No. CD’s are simpler. You get your fixed coupon and on maturity you get your principal back.
@Kingran I wouldn’t recommend $TLT because …
ETFs do not have a maturity date like an individual bond does. If interest rates rise the NAV of TLT will fall and you won’t be able to hold it to maturity and get all your money back like you would with a bond.
Look at the chart for TLT. As interest rates rose the NAV of TLT dropped.
If you want to own bonds I strongly recommend that you think about when you will want to use the money and set up a ladder. It’s more work than a bond fund but you will be in control and you won’t lose money. Buy the bonds with maturity dates that fall when you expect to need money. I think this is less complicated and less risky than options.
Wendy
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@MarkR if you take monthly distributions the interest isn’t “phantom.”
But if you choose the option of compounding the interest until maturity the interest is phantom and it is taxable in the year it is earned. That’s what I do.
Wendy
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Yes, I understand that. For me, TLT is a vehicle to express my views on interest rates, rather than a fixed income instrument. For that, I primarily use treasuries, CD’s, and couple of bank preferreds. TLT is very liquid and I can write options on that.
Currently, trading income(75%), dividends (20%), and interest (5%) covers our living expense and my wife’s salary goes to paying taxes, 
, and supporting our son.
For now, I cannot build an fixed income portfolio for tax reasons. But, I realize, soon I may have to bite the bullet, pay the tax. I guess it is either you pay tax, or suffer drawdown, is what it is going to be the more I drag that decision.
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How do you do that?
What do you think interest rates will do between now and the 20 year duration of TLT?
Wendy
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You are viewing $TLT as a bond, I am viewing it as a vehicle to express my views on interest rate, i.e., I will short when I think rates are going to go up or buy when I think rates have bottomed. Also, often I don’t even directly short or go long, instead use options. For ex: so far I have traded 38 options, many a week expiry, some LEAPS… Typically I am focused on the direction, often for the week, to a month. I don’t take long-term views.
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