Thanks to higher yields, Treasury Inflation-Protected Securities look more attractive than they have in years.
For those unfamiliar, TIPS are bonds issued by the US Treasury that, unlike traditional Treasuries, fully hedge against inflation. When you buy an individual TIPS and hold it to maturity, you’ll do no worse than maintain your purchasing power.
That alone isn’t enough to sate investors. They also demand extra compensation for lending their capital to Uncle Sam, which they receive in the form of a “real yield,” a return above and beyond the rate of inflation. It’s also guaranteed. Thus, assuming a positive real yield, if you hold an individual TIPS from issuance to maturity, you’re assured of earning a positive real return.
TIPS’ real yields fluctuate in the normal course depending on fiscal and monetary policy, supply and demand, and other factors. Lately, they’ve moved to their highest levels since 2008.
Are they a buy at these levels?
TIPS Versus Equity
The answer to that question depends to a large extent on opportunity cost: What are you giving up in exchange for the guaranteed positive inflation-adjusted return?
Provided you have a long enough time horizon, it’s hard to make the case for TIPS—or any type of bond for that matter—as a substitute for equities. After all, even with a certain expected real return, you still could be leaving some money on the table, as stocks have routinely earned a far higher inflation-adjusted return than what TIPS are offering these days.
To illustrate, here are the rolling 10-year inflation-adjusted annual returns of US large-cap stocks (the solid blue line) compared with the real yield on 10-year TIPS (the dotted line) as of Aug. 24, 2026.
For those in, or soon to enter, retirement, the calculus could be different. Many of you likely have at least some of your retirement funds in equities, a prudent choice considering the typical new retiree can expect to live at least a decade or two, long enough to justify a stock stake. (Morningstar’s State of Retirement Income study has consistently found that portfolios with at least 30% in stocks do a better job of sustaining retirement spending than all-bond allocations.)
Notwithstanding that, with stocks in the midst of a prolonged bull market, valuations stretched by some measures, and sequence of returns risk posing a threat to newer and prospective retirees, you can make an argument for derisking by shifting a portion of the stock stake to individual TIPS or target-maturity exchange-traded funds.
Make no mistake, doing so involves a big tradeoff—certainty for potential upside. (And, yes, my argument is kind of a straw man: Essentially, stocks versus bonds, the only difference with TIPS being the inflation hedge.) But it could be worth it under certain circumstances, such as when you lack a large margin for error after considering the sufficiency of your retirement savings to fund your future spending needs.
TIPS Versus Bonds
If the argument for subbing TIPS for stocks is a little shaky, the case versus bonds seems more clear-cut. For context, here are the rolling 5-year inflation-adjusted returns of 5-year US Treasuries since 1990:
(Note: I chose a shorter 5-year rolling period for fixed income given that bonds are better suited to near-term objectives, rather than longer-term goals.)
To be sure, 5-year Treasuries have been shown to generate competitive annual real returns in recent decades. For instance, nominal Treasuries earned more than 2% after inflation—which approximates the recent real yield on 5-year TIPS—over several 5-year periods in recent decades. But nominal Treasury yields were usually higher at the start of those rolling periods than they’ve been recently.
You can see that in the following chart, which plots starting 5-year nominal Treasury yields against their subsequent 5-year annual real returns.
For instance, the nominal 5-year Treasury yield was 6.36% on Jan. 1, 2000, and 5-year Treasuries proceeded to earn 4.2% real per year over the subsequent 5-year period. To put that in perspective, the 5-year nominal Treasury yield was only 4.41% as of Aug. 24, 2026. (It’s shown as the vertical dotted line in the plot above.)
All told, 5-year Treasuries generated 2%-plus real returns in less than half the rolling 5-year periods since 1990. And they did so with a starting nominal yield of 4.4% or less in only 9% of the rolling periods, meaning there was less than one-in-ten chance of earning more than 2% after inflation if nominal yields weren’t higher than they recently were.
TIPS also look attractive on other dimensions: As might have been apparent in the first chart, 5-year TIPS’ recent 2%-plus real yield ranked in the 11th percentile historically. While 5-year TIPS’ 2.3% per year inflation breakeven—the difference between their real yield and the yield on a 5-year nominal Treasury—is slightly higher than the roughly 2% average since 2003, it doesn’t seem heroic to imagine a scenario where inflation comes in a bit above that level in the coming years. After all, inflation has been running hotter than that for more than five years now.
Given this, it seems like a far stronger argument could be made to replace at least a portion of one’s fixed-income allocation with TIPS. For those utilizing popular bond index funds, note those benchmarks don’t typically include TIPS.
Having said that, it’s worth being mindful of the possibility—however remote considering the gaping Federal budget deficit, massive debt, and other factors—that inflation could be less than what’s priced in today. In that scenario, nominal Treasuries will outperform. (Deflation isn’t a risk to TIPS investors’ capital, as the Treasury guarantees repayment at the greater of inflation-adjusted principal or par.)
TIPS Versus Cash
I’ll keep this one brief: Cash isn’t an ideal place to try to earn a positive inflation-adjusted return. Here are the rolling 12-month real returns of US Treasury bills:
The good news is cash kept pace with inflation over the average one-year period. The bad news is the results varied greatly; there were periods where stashing cash was a big loser in real terms and others where it was a profitable tactic.
That aside, the first question to ask is when you’re going to need the cash. If the answer is in weeks or months, then it’s risky to buy longer-term TIPS with the intention of holding to maturity. There are a few ETFs that invest in short-term TIPS, in which case you could lock in inflation protection over a shorter interval, but you’d still be courting some interest rate risk.
If you’ve got more cash than your anticipated and potential emergency short-term spending needs might warrant, an allocation to short- or intermediate-term TIPS could make sense.
Caveats
There are a few potential catches to consider.
For starters, if you buy a TIPS fund, you can count on the inflation hedge, but there’s no guarantee you’ll avoid losses after inflation, a point my colleague Amy Arnott recently made. That’s because most TIPS funds are near-constant duration, meaning they replace maturing bonds with newer issues, which courts interest rate risk. It’s why the average TIPS fund lost 11.8% in 2022.
From a portfolio construction perspective, if you don’t have a stand-alone allocation to TIPS now, it’s worth considering that you’d potentially be adding another holding to the mix, with all the added complexity and associated maintenance needs. For some, the juice won’t be worth the squeeze.
Also, as mentioned, investing in TIPS funds can be quite a different proposition than buying individual inflation-indexed Treasuries (or ETFs that do so) and holding to maturity. Holding to maturity will take interim mark-to-market changes off the table. But it can be a bit of a hassle to buy and maintain individual TIPS.
Finally, if you’re planning to hold TIPS outside of a qualified account, keep in mind that you’ll be on the hook to pay taxes not just on the coupon income you receive (for example, the real yield) but also on the inflation adjustment to principal. The latter is sometimes referred to as “phantom income” tax, as the inflation adjustment isn’t actually received until maturity, yet the tax is owed each year anyway.
Switched On
Here are other things I’m reading, watching, and listening to:
- Bryan Armour on disastrous ETFs
- Concentration has come to emerging markets
- Jason Zweig beat me to the punch: A great article on TIPS’ appeal
- Vanguard has come for advice
- Ellen Barry. Anything she writes
- Pearl Jam “Release” (Live)
- Once Upon a Time in Hollywood
Don’t Be a Stranger
I love hearing from you. Have some feedback? An angle for an article? Email me at [email protected]. If you’re so inclined, you can also follow me on Twitter/X at @syouth1, and I do some odds-and-ends writing on a Substack called Basis Pointing.