Bought 20-Year TIPS

I bought more TIPS today. For people not familiar with TIPS, they are inflation indexed bonds. See previous post TIPS: Inflation Linked Bonds for more information.

Like everybody else, I feel the threat of higher inflation. A tank of gas cost me $58 last week. For the longest time it was $30-35. I still remember the exact gas station where I filled up when it crossed $40 for the first time a few years ago. Pretty soon it will be over $60. I don’t even have a big car.

The price for inflation protection actually came down lately. The following chart shows the yield on 20-year TIPS. A higher yield means a lower price.

Source: Federal Reserve Bank of St. Louis.

I bought some 20-year TIPS at a yield of about 2.2% (red line in the chart). Although it’s way below the 2.8% peak level in summer 2007, the yield has been much lower this year. It was at a low of 1.6% just 3 months ago. 2.2% is in the middle between the recent peak and trough. So I think it’s a reasonable price for more inflation protection. I chose 20-year TIPS because they have the highest yield (lowest price) and they offer inflation protection for the longest time.

I bought on the secondary market through Vanguard and I had to pay a $40 commission. It’s OK because I want to lock in to this price now. Fidelity and Schwab don’t charge a commission for buying TIPS online. The next TIPS auctions will be on July 10, 2008 for 10-year TIPS and July 22, 2008 for 20-year TIPS. If the yields remain attractive, I will buy more then.

Related Post: Individual TIPS Or TIPS Mutual Fund

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  1. AGG says

    I’ve read an interview with Bill Gross, who is a well recognized authority in bonds, manager of the Pimco Total Return fund. He said that the treasuries are way oversold and while it is not time yet to consider high-yield, he is moving into AA and A rated bonds.
    You are advocating TIPS, does it not bother you that it is so much oversold? Everyone is looking for a safe heaven nowdays. Last year it was international, then commodities and goverment-backed since S&P is still batting 1400.

    Why bonds now at all? You are getting 2.2%, then by not cash? My fidelity FDRXX does better than that?

  2. Harry Sit says

    Bill Gross likely said TIPS are overbought, not oversold. They may have been overbought a few months ago. The chart I included shows the price for inflation protection has come down to a level which I consider reasonable.

    It’s “2.2% + inflation”, much higher than FDRXX.

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