Treasury Inflation-Protected Securities Achieve Highest Real Yield in Almost 15 Years

by | Jul 30, 2023 | TIPS Bonds | 4 comments




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LEARN MORE ABOUT: Treasury Inflation Protected Securities

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Highest Real Yield In Nearly 1.5 Decades: Treasury Inflation-Protected Securities

In a surprising turn of events, Treasury Inflation-Protected Securities (TIPS) have recently achieved their highest real yield in almost fifteen years. This unexpected rise in yield has caught the attention of investors around the globe, with many wondering how TIPS managed to secure such an impressive return.

TIPS are a type of US government bond that is specifically designed to protect investors from inflation. Unlike traditional bonds, TIPS provide an adjustable principal amount that is indexed to inflation, thereby ensuring that the investor’s purchasing power remains intact. When inflation rises, the principal value of TIPS increases, which results in higher coupon payments and an overall higher return for investors.

The real yield on TIPS is the return that investors receive above and beyond the inflation rate. It is an important metric for investors to gauge the true value of their investment, as it reflects the actual purchasing power gained from holding TIPS.

The recent surge in TIPS yields can primarily be attributed to two factors. Firstly, the rapid rise in inflationary pressures has led to an increase in demand for TIPS. As prices rise, investors become more concerned about maintaining the value of their investments. TIPS offer a reliable hedge against inflation, making them an attractive option for those seeking protection.

Secondly, the Federal Reserve’s decision to keep interest rates low has further buoyed TIPS yields. As interest rates remain low, the fixed coupon payments provided by TIPS become more appealing to investors seeking stable, higher-yielding assets. This increased demand for TIPS has driven up their real yield.

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The highest real yield in nearly 1.5 decades is a positive development for investors looking to safeguard their purchasing power. With inflationary pressures on the rise, TIPS provide a safe haven for those seeking protection against eroding value.

Additionally, this spike in TIPS yields may have broader implications for the overall market sentiment. As investors flock to TIPS, it could signal growing concerns about inflation and its potential impact on investment returns. This shift in investor sentiment may lead to increased volatility in other asset classes, such as equities and traditional bonds.

However, it’s important to note that investing in TIPS is not without risks. While they offer protection against inflation, TIPS can still be subject to interest rate risk and fluctuations in market conditions. Investors should carefully evaluate their investment objectives and risk tolerance before allocating a portion of their portfolio to TIPS.

In conclusion, the recent surge in real yields for Treasury Inflation-Protected Securities is a significant development in the fixed income market. As inflation concerns continue to mount, investors are flocking to TIPS as a reliable inflation hedge. This increased demand has resulted in the highest real yield in nearly 1.5 decades, providing an attractive option for those seeking to protect their purchasing power. However, investors must remain cautious and fully understand the risks associated with TIPS before making any investment decisions.

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4 Comments

  1. Dani Elle

    So that means a real-yield of 1.82% for the 5-year term?

  2. lylibmi lano

    I dont understand why this below 3% is great ourcome for TIPS. I meant compared to TBills.

  3. Rick Clark

    Thanks for your realistic, clearly articulated, sage, and sober informational videos that really help people- so much in contrast to the hypers and hawkers trying to draw in get-rich-quick suckers. I was able to take advantage of this TIPS auction thanks to being educated by you.

  4. Head Librarian

    What benchmark spreads are you looking for on TIPS? A full 2%?

    It will be interesting to see the spreads in July’s Treasury FRN auction. Maybe we will get 250 bps if institutional investors are also demanding higher TIPS spreads. The last one (reopening June 28th) was 170bps. Much better than the noxious negative spreads FRNs got in 2020. I don’t know why institutional buyers are such dumb bidders.

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