Fidelity Investments offers TIPS on the secondary market. With the extreme action in the bond market (especially a gap down in the 10 year Treasury price) the TIPS offerings are exceptional.
UNITED STATES TREAS NTS SER A-2035 2.12500% 01/15/2035 CUSIP 91282CML2 YTM 2.40%
The 2040 and 2041 TIPS are also good – currently yielding over 2.6%.
Like all TIPS, both the interest and increase in bond principal are taxable as ordinary income though the principal isn’t paid until maturity.
Will I live until 2040? My cardiologist thinks so. I can sell the bond if I need the money before maturity. Unlike an I-Bond (which is always redeemable at par) a TIPS bond will decrease in value if interest rates rise when cashed before maturity.
You are far more versed in the bond market than I am.
I look at what happened in these circumstances in the UK during 2022 to the Gilt Market. What do you make of the parallels? Particularly after the Gilt Market meltdown with higher yields ever since.
Could the U.S. Treasury market melt down with exponentially increasing deficits?
Yes.
But the rest of the world also has tremendous government deficits. Until there is a credible alternative the U.S. Treasury will be held as the safest asset internationally – as long as the government NEVER defaults on an interest payment.
Wendy
The deficit spending is one thing. We do pay for the interest generally while rolling over some of the maturing debt.
This is more extreme. Part of the problem, we are diving into a global great depression. We are refusing as a country to retool when we should be. The tax cut is a bridge too far.
There is a rate of debt accumulation that is far too fast.
The deficit hawks in the House capitulated yesterday.
About nine-tenths of the total went toward federal programs; the remainder went toward interest payments on the federal debt. Of that $6.9 trillion, almost $4.9 trillion was financed by federal revenues. **The remaining amount was financed by borrowing.**Jan 28, 2025
With the tax cuts and a failure to buildout factories the ability to cover the federal budget would fail. The 10% of receipts that go to interest payments would fail. While cutting $150 b or $200 b is possible, the $6.7 tr budget would not have anything close to $4.9 tr in funding.
We know the process we see unfolding will explode the deficit. We are already heavily burdened with debt. We won’t reliably manage a much more rapid expansion of debt.
The debt market is out in front of you calculating what I am stating.
Finance is about proportions. Raising the corporate tax for a factory buildout would be incredible for enriching our nation. Instead we are proposing to do the opposite and we must expect horrendous results. After all we are plunging into a great depression.
China is resuming their factory buildout because we are declining on the world stage to do so. The Chinese are very happy right now.
Every investor is different and risk tolerance is different. I like TIPS because they provide me with income which keeps up with inflation. I don’t like the volatility of the stock market. Given my balance of income and expenses I don’t need to take the risk.
Currently, the stock market is in a historic bubble. When valuations are more in line with the historic average I will buy stocks. Before then I don’t want to play musical chairs.
Wendy
You think it is preferable over locking 10 yr 4.5% or 5%? Today you are getting at least 2% real return, over the full term, how TIPS is preferable over buying treasuries, that is what I am trying to understand.
Please ignore stock market, if you want compare it with other fixed income, fine. Talk to me like you are talking to an idiot (which I am) or a 5 year old.
If you think that inflation will match today’s market expectation in the future then TIPS and Treasuries are equivalent. If you think that inflation will exceed today’s market expectation then TIPS will have a higher yield.
I think that high inflation is a greater danger than many believe. Prices of goods and services are a function of supply and demand. Goods inflation will rise because of the tariffs. But services are 80% of the economy. Service inflation is rising faster than goods inflation because of demographic factors – much of the work force is retiring and many of the hands-on service jobs are performed by immigrants which the current administration is determined to reject. This will inevitably cause wages to rise since those jobs must be done somehow.
Another factor is that the market for Treasuries is much larger than the market for TIPS so TIPS are often “forgotten” in volatile times (or if the bond market panics and fears of recession cause a fear of deflation). This happened in October 2008 when the yield from Treasuries was momentarily lower than the yield from TIPS. I bought a bunch of 10 year TIPS yielding 3% then because I firmly believe that inflation is embedded in the American economy even if deflation happens for a few months. When they matured in 2018 I was sorry I hadn’t bought longer durations. These TIPS’s values rose but I held instead of selling.
This is why I think that locking in a 15 year TIPS at 2.6% over inflation will yield better than a 4.6% Treasury. I think that long-term inflation will be over 2%.
Technology innovation has resulted in keeping inflation under check. Now, with AI technology breakthrough, don’t you think AI will be a major labor supplier for the next 10, 20, 30 years?
The way I see that is, the market dislocation on TIPS will be far higher rather than “forgotten”.
I am very conflicted on inflation, while Tariff could result in Inflation, and a high tariff level could be systemic and cause inflation over a decade, we really don’t know where the tariff levels will land, and US policy is standing on its head every 4 years. What if the next administration throws out all the tariffs??
In the short-term we may actually not see inflation due to falling crude oil prices and due to economic weakness. Currently inflation is high due to used car prices, insurance and home rent. Going forward, they may not be headwind, but tailwind and inflation could be falling hard.
“Technology innovation has resulted in keeping inflation under check. Now, with AI technology breakthrough, don’t you think AI will be a major labor supplier for the next 10, 20, 30 years?”
Perhaps but I don’t think so. The economy is 80% service and much of it is hands-on. I don’t see AI repairing roofs, caring for elders or performing agricultural tasks. Yes, AI will save effort and replace some services but the hands-on tasks will become more expensive.
“How do you search for this in fidelity?”
Go to Research → Fixed Income → Bonds → Treasuries → TIPS secondary market.
The probability of deflation in the US economy in 2025 is considered low by most economists, although there are some concerns and potential risks. Some models predict a slight chance of recession, which could potentially lead to deflation, but overall, the outlook is for continued growth and inflation, not deflation.
Dear Wendy,
Who are the economists that think that? Any employed by Goldman? MS? Wells Fargo? Chase?
The FED PCE target of 2.0 inflation works out to about 2.3 CPI inflation. This is close to the current 10-Year Breakeven Inflation Rate of 2.2. The market is showing confidence that the FED will keep average inflation close to their target over 10 years.
