If you’ve looked at your bond portfolio lately, you might have felt a bit of a sting. With inflation remaining stubbornly elevated and traditional bond prices taking a hit as interest rates rise, finding a safe haven for your cash has been a challenge.
But there is one major exception to the rule right now: Treasury Inflation-Protected Securities (TIPS).
Despite being backed by the full faith and credit of the U.S. government, TIPS remain one of the most underutilized tools in the average investor's toolkit. Here is why they deserve a closer look today.
The Power of the "Real Yield"
Unlike standard bonds, TIPS offer built-in insurance against inflation. Their return is split into two parts:
They pay you the rate of inflation (tracked by the U.S. Consumer Price Index).
They give you a "real yield" bonus on top of that inflation adjustment.
Right now, 30-year TIPS are offering a real yield of nearly 3%.
To put that in perspective, that is close to a 30-year high. It means you can lock in a guaranteed return that beats inflation by 3% for three decades, completely free of stock market volatility.
"With 30-year TIPS now yielding almost 3% real, investors can now lock in inflation-adjusted returns competitive with traditional portfolios without the risks that come from a large slug of equities." > — Bob Elliott, CIO of Unlimited Fund
TIPS vs. Standard Treasuries: The Math
How do you decide between a regular 10-year Treasury note and a 10-year TIPS? It all comes down to the "break-even" math:
10-Year Treasury Yield: ~4.60%
10-Year TIPS Real Yield: ~2.15%
The Break-Even Number: 2.45% (4.60% minus 2.15%)
If you think inflation will average more than 2.45% over the next decade, TIPS are the mathematically superior investment. Given that inflation has been hovering well above the Fed's 2% target, TIPS look like a very smart bet.
How to Add TIPS to Your Portfolio
If you're ready to add some inflation insurance to your portfolio, you have a few easy entry points:
1. Exchange-Traded Funds (ETFs)
Buying individual TIPS can get mechanically complicated because the inflation adjustments affect the bond's principal amount. Low-fee ETFs simplify this process and regularly payout the inflation-related interest.
Some of the largest and most cost-effective options include:
Vanguard Short-Term Inflation-Protected Securities (VTIP): Ideal for shorter-term protection with less price risk. (Expense ratio: 0.03%)
Schwab U.S. TIPS (SCHP): A broad-market TIPS fund with an ultra-low fee. (Expense ratio: 0.03%)
iShares TIPS Bond (TIP): A massive, highly liquid fund covering a range of maturities. (Expense ratio: 0.18%)
2. Buy Direct from the Government
You can buy individual TIPS directly from the government via Treasury auctions (the next 5-year auction is coming up in June).
3. Consider Series I Savings Bonds
If you want a similar inflation-fighting tool with tax-deferred perks, look into I Bonds via Treasury.gov. They currently yield 4.26% through October, though purchases are strictly capped at $10,000 per calendar year per person.
The Bottom Line
Every investor worries about inflation eroding their purchasing power, yet few actually buy the insurance designed to stop it. With real yields at historic highs, it’s time to stop ignoring TIPS and give your portfolio the inflation shield it needs.