TIPS Real Yields at 2.35% Make Inflation-Protected Bonds a Rare Buy

Ten-year TIPS real yields at 2.35 percent outpace the 2.34 percent breakeven inflation the market prices, while core PCE runs at 3.3 percent — making inflation-protected bonds the rare asset that beats inflation by contract.

"The only asset I can point to right now that is contractually guaranteed to beat inflation is a Treasury Inflation-Protected Security, and the market has it priced as if inflation is going to fall much further than it actually has," Austin Smith, a financial publisher at 24/7 Wall St., wrote in a commentary published Aug. 24.

The TIPS real-yield curve is positive across every maturity. The 5-year yields 2.05 percent real, the 10-year 2.35 percent, the 20-year 2.73 percent, and the 30-year 2.95 percent. The 10-year nominal Treasury yields 4.69 percent, putting the breakeven inflation rate at roughly 2.34 percent — nearly a full percentage point below the 3.3 percent core PCE reading for June. Gold has climbed about 7 percent to roughly $4,730 an ounce since Treasury Secretary Scott Bessent announced Aug. 19 that the department would double its liquidity-support purchases of longer-dated securities to $4 billion per operation. Bitcoin has risen more than 24 percent to nearly $80,000 over the same period.

The gap between breakeven inflation and actual core PCE matters because it determines whether TIPS outperform nominal Treasuries over the next decade. If inflation averages above 2.34 percent — which current data suggest is likely — TIPS beat nominal bonds. The last time the 10-year breakeven rate sat this far below core PCE was in 2021, when inflation subsequently ran well above market expectations for three consecutive years.

The mechanics of TIPS are straightforward. The principal adjusts with CPI, so the face value grows with inflation. The coupon is paid on the adjusted principal, so each semiannual interest payment rises with inflation too. At maturity the investor receives the greater of the adjusted principal or the original par, so deflation cannot pull the return of capital below face value. When you see a TIPS yield, it is a real yield — a return above whatever inflation turns out to be over the life of the bond.

The Breakeven Gap Widens

The 10-year nominal Treasury yields 4.69 percent. The 10-year TIPS yields 2.35 percent real. The gap between the two, roughly 2.34 percent, is the inflation rate at which the two bonds produce the same total return over a decade. Bond traders call it breakeven inflation.

Core PCE is currently running at 3.3 percent. The market is pricing 10-year inflation at roughly 2.34 percent. The bond market is priced for inflation to fall by nearly a full percentage point from where it actually sits, and to stay there for ten straight years.

If inflation runs hotter than 2.34 percent on average over the next decade, TIPS beat the nominal Treasury. If inflation runs at exactly 2.34 percent, they tie. If inflation collapses well below target and stays there, the nominal wins. Given that inflation has not yet returned to the Fed's 2 percent target and is currently well above the breakeven, TIPS look like the better side of that trade.

Scarce Assets Draw the Bid

The TIPS story is part of a broader rotation into assets with limited supply. Treasury Secretary Scott Bessent's Aug. 19 announcement that the department would double its buybacks of longer-dated securities to $4 billion per operation, and the possibility of using nearly $1 trillion from the Treasury General Account to fund those purchases, has pushed the 10-year yield to about 4.70 percent and the 30-year toward 5.24 percent.

Gold has climbed from about $4,424 before the announcement to roughly $4,730 today, a gain of almost 7 percent. Bitcoin has risen from $64,269 to nearly $80,000, an increase of more than 24 percent. Both moves reflect investor demand for assets that cannot be printed or diluted.

The bigger investment signal isn't simply that gold is rising. It is that markets increasingly expect policymakers to intervene when higher yields threaten financial conditions. For investors, owning some scarce assets makes sense in that environment. Gold looks particularly compelling as a portfolio hedge because its latest move is being reinforced by falling yields, a weaker dollar, and renewed concerns about fiscal policy. Treasury may succeed in calming the bond market, but that could ironically make the case for owning assets outside the traditional dollar-and-Treasury system even stronger.

For TIPS specifically, the trade is cleaner. A 10-year TIPS locks in a 2.35 percent return above CPI for a decade, guaranteed by the Treasury if held to maturity. A savings account cannot promise that for a single day, because the APY can be lowered any time the bank decides. At a 32 percent federal marginal rate, a 3.80 percent savings APY becomes 2.58 percent after tax. Subtract the 3.3 percent core PCE and the real after-tax return on savings is roughly minus 0.72 percent.

The last time the 10-year breakeven rate sat this far below core PCE was in 2021, when inflation subsequently ran well above market expectations for three consecutive years. If history repeats, TIPS holders are positioned to capture the difference.

This article is for informational purposes only and does not constitute investment advice.