TIPS, real yields and breakeven inflation
TIPS (Treasury Inflation-Protected Securities) are government bonds whose principal rises with the Consumer Price Index, so their yield is a "real" yield: the return on top of inflation. Subtracting a TIPS yield from the ordinary Treasury yield of the same length gives breakeven inflation, the inflation rate at which the two would pay the same.
In brief
- TIPS are sold with 5-, 10- and 30-year terms.
- Principal is adjusted with CPI-U; interest is paid on the adjusted amount.
- Real yield = return above inflation. It can be negative.
- Breakeven inflation = ordinary Treasury yield minus TIPS yield, same maturity.
- Breakevens reflect market pricing, which is not the same as a forecast.
What are TIPS?
TIPS are Treasury securities built to keep pace with prices. The amount you are owed (the principal) is adjusted up as the CPI-U price index rises, and the twice-yearly interest is paid on that adjusted amount. At the end you receive the adjusted principal or the original, whichever is larger.
They are issued for 5, 10 and 30 years and trade every day like other Treasuries, which means their market price moves, sometimes sharply, when interest rates change.
What is a real yield?
A real yield is the return an investor earns over and above inflation. Because TIPS already compensate for inflation through the principal, the yield quoted on them is a real yield. A 10-year TIPS yielding 2% promises about 2% a year more than inflation for ten years, whatever inflation turns out to be.
Real yields can be negative. When they are, buyers are accepting a guaranteed loss of purchasing power in exchange for safety, as happened in 2012 and again in 2020 and 2021.
The Treasury publishes a daily real yield curve at 5, 7, 10, 20 and 30 years.
What is breakeven inflation?
Breakeven inflation is the ordinary Treasury yield minus the TIPS yield of the same maturity. If the 10-year Treasury yields 4.3% and the 10-year TIPS yields 2.0%, the ten-year breakeven is 2.3%.
The name describes a comparison. If inflation over the ten years averages more than 2.3%, the TIPS holder ends up ahead; if it averages less, the ordinary Treasury does better; at exactly 2.3% they break even.
Is breakeven inflation a forecast?
Only loosely. It is the inflation rate implied by two market prices, and those prices also contain things that have nothing to do with expected inflation: a premium for the risk that inflation surprises, and a discount because TIPS are harder to trade in size than ordinary Treasuries. The Federal Reserve calls the measure "inflation compensation" for that reason.
Treat a breakeven as what the bond market is charging for inflation protection today. It moves with sentiment and with trading conditions, and it has been wrong in both directions.
Where are these on this site?
The TIPS page shows the real yield at each maturity and the breakeven beside it, from the Treasury's daily figures. For the ordinary curve see the Treasury yields page, and for the savings-bond cousin of TIPS see how I Bond rates work.
Questions and answers
What is a real yield?
A real yield is the return on a bond after inflation. Yields on TIPS are real yields because the bond's principal already rises with the Consumer Price Index.
How is breakeven inflation calculated?
Subtract the yield on a TIPS from the yield on an ordinary Treasury of the same maturity. The result is the average inflation rate at which the two would give the same return.
Can TIPS lose money?
Held to maturity, TIPS return at least the original principal plus the inflation adjustment. Sold earlier, they can lose money, because their market price falls when real interest rates rise.
What is the difference between TIPS and I Bonds?
Both follow the same price index. TIPS are traded securities whose price can fall and which have no practical purchase limit; I Bonds are savings bonds that cannot be traded, never lose value, and are limited to $10,000 a year per person.
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