Inflation protection used to cost you something — now it's tipping in your favor. Treasury Inflation-Protected Securities (TIPS) are offering real yields near their highest levels in years, making them unusually attractive against a backdrop of elevated stock valuations and a jittery bond market. Here's how you can take advantage of this opportunity.
Unlocking opportunity: TIPS real yields have climbed to levels that make them a much more attractive alternative to stocks than they’ve been in years. The 30-year TIPS now offers a real yield of around 3%, while five-year TIPS yield more than 2.1%. For the 30-year bond, inflation only needs to average about 2.2% for TIPS to outperform a regular Treasury, giving investors both inflation protection and a relatively high return above inflation.
- The 30-year Treasury yields over 5.2%, but TIPS only need inflation to stay above ~2.2% over time to outperform regular Treasurys.
- July inflation came in at 3.4%, already comfortably above that ~2.2% break-even level and giving TIPS plenty of room to outperform.
The Yield Tradeoff
The real yield opportunity is attractive, but long-dated bonds are also facing some serious pressure. The $30T Treasury market is absorbing heavy deficit spending, surging AI-related corporate debt issuance, and a rising term premium that strategists expect to stick around. Foreign ownership of US Treasurys has also fallen to 23% from ~33% over the past decade, weakening a major source of demand. “The long end of the curve is fighting a lot of forces,” noted Andrew Szczurowski of Morgan Stanley Investment Management.
- TIPS with maturities of 10 years or more have lost as much as 41% during sharp rate spikes, with nearly twice the volatility of five- to 10-year TIPS.
- During the 2013 taper tantrum, long TIPS lost much more than other investment-grade bonds, highlighting how rate risk can swamp the inflation hedge.
Building exposure: Morningstar recommends allocating 20%–40% of fixed-income holdings to TIPS for investors near or in retirement, with a focus on short- to intermediate-term maturities held for at least two to six years. A TIPS ladder, which spreads maturities across several years, can capture today’s elevated real yields without taking on decades of interest-rate risk. For better tax efficiency, TIPS can be held in an IRA, since both interest payments and inflation adjustments to principal are taxed as ordinary income.
