TIPS Yield On the Rise

When I sold two bond ETFs in March for house cleaning, I intended to buy more 5-year TIPS in the auction in April. However when April came, the expected yield wasn’t attractive to me. So I took a pass and parked the money in Treasury Bills. Lately, the TIPS yield has been rising. The 5-year TIPS auction on April 24, 2007 came out to 2.114%. A little over a month later, the yield rose to 2.58% on June 1, 2007. Although it’s still below the 2.691% yield I got last October, it’s pretty close. According to this chart from St. Louis Fed, the current TIPS yield is close to the highest level in the last few years.

Source: Federal Reserve Bank of St. Louis.

If you are not familiar with TIPS, please note the yield numbers are after inflation.

Why did this happen in such a short time? I have no idea. The market determines the prices. We get to decide whether we want it or not at that price. 2.1% in April wasn’t attractive to me. 2.5% is now. The next TIPS auctions are in July, for 10-year and 20-year terms. I prefer 5-year and the next auction for 5-year TIPS notes won’t come until October. Because I want to lock in the attractive 2.5% yield now, I bought some 5-year TIPS on the secondary market. I had to pay a brokerage commission, but the commission only reduces my yield by about 3 basis points or 0.03%.

What does the higher yield mean in dollar terms? In real dollars, investors paid $99.465161 per $100 on 4/30/2007 when the auction settled. I paid $97.4375 for the same bond on 5/31/2007. A price decline of 2% in one month looks trivial for stocks — sometimes stocks go up and down by 2% in a day. For bonds, it’s a bigger deal because it’s like getting an extra year of interest only a month later.


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  1. Chuck Fouts says

    I’ve read a few things that say that yield rates can only go up from here. I don’t normally consider bonds when investing but if the TIPS yield rises to 3.0% it would be very attractive.

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