On Wednesday we added an inflation-protected bond fund, LTPZ, to our income holdings. On Friday the Journal’s Heard on the Street column ran a piece called “Inflation Protection Is on Sale.” We would love to say we planned that. We did not. We just read the same numbers.
Here is the setup, and it is unusually simple.
A regular thirty-year Treasury bond pays more than 5.2%. The thirty-year TIPS — short for Treasury Inflation-Protected Securities, a government bond whose value rises along with consumer prices — pays about 3% on top of inflation. That is the highest in years.
Subtract one from the other and you get the break-even: about 2.2%. That is the inflation rate at which the two bonds tie. If inflation runs above 2.2%, the TIPS wins. Below it, the plain Treasury wins.
| Measure | Level | What it tells you |
|---|---|---|
| 30-year nominal Treasury | >5.2% | What you get if inflation behaves |
| 30-year TIPS real yield | ~3.0% | Yield above inflation, highest in years |
| 30-year break-even | ~2.2% | Inflation above this and TIPS win |
| 5-year TIPS real yield | >2.1% | Also near multi-year highs |
| Headline CPI, July | 3.4% y/y | The index TIPS actually track |
| Core CPI, July | 2.5% y/y | Excludes food and energy |
Read That Again
Headline inflation is running 3.4%. The break-even is 2.2%. Inflation does not need to speed up for this to work. It just needs to not fall by more than a point and stay down for thirty years.
That is the whole argument, and it is why this is a defensive move, not an aggressive one. You are not betting that prices spiral. You are declining to bet that they behave.
Which Inflation Counts
This matters, and almost nobody checks it. TIPS adjust off headline CPI — the version of the government’s inflation index that includes food and energy. Those are the two things economists routinely strip out and retirees routinely buy.
So the index that pays you is the one with gas and groceries in it, not the polite 2.5% “core” figure. In July, that was a 0.9-point difference in your favor.
The index is not perfect. Kevin Warsh told a Senate hearing in July that the government’s inflation measures are imperfect, and he has a point. College tuition and eldercare have risen far faster than the index says. If those are your two biggest future bills, TIPS only partly protect you.
Partly is still better than not at all. Nobody sells a bond indexed to your grandchild’s tuition.
Three Rules First
First, hold TIPS in a tax-deferred account, like an IRA. The inflation adjustment gets taxed as income each year, even though you do not receive that cash until the bond matures. Inside an IRA the problem disappears. In a regular account you can owe tax on money you have not been paid, which is the most common way people talk themselves out of a perfectly good bond.
Second, know which number moves your money. If someone tells you inflation is 2.5%, that is the core figure — not the headline number your TIPS actually track.
Third, consider a ladder. That means buying individual bonds that mature in different years, so cash comes back to you on a schedule you choose. Each rung locks in today’s rate. Funds and ETFs are simpler, and simple is fine — but a fund never matures, so it never guarantees the rate you see today. A bond you hold to the end does.
The five-year TIPS pays more than 2.1% above inflation, also near multi-year highs, so you do not have to commit to thirty years to participate.
The honest verdict, and the Journal’s, is the same: good inflation protection and decent yield. That is not a thrilling sentence. It is not supposed to be. Retirement income is a job where boring is the deliverable.