Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How TIPS Are Beating the Inflation Slowdown
Transcript
- Lucas: So the Fed holds rates steady yesterday, and the big story that a lot of people missed is what happened to Treasury Inflation-Protected Securities — TIPS. They've been quietly crushing other inflation hedges over the past month. Luna: I noticed that. Gold is basically flat over the last five days, silver is actually down, but the TIPS ETF, GLD's cousin I guess you could say, is up. What's driving that? Lucas: Right, GLD — the gold ETF — is up maybe half a percent in five days. The gold miners ETF, GDX, is up eight and a half percent. But TIPS have a different story. The real yield on five-year TIPS has turned positive for the first time since before the pandemic. That's a huge shift. Luna: Positive real yield meaning the yield after inflation expectations? So you're actually getting a return above inflation now? Lucas: Exactly. For years, TIPS had negative real yields — you were effectively paying the government to protect you from inflation. But with the Fed holding rates at 3.63 percent and breakeven inflation dropping to 2.26 percent on the ten-year, the math flipped. TIPS now offer a positive real yield of about 0.4 percent on the five-year. It's not huge, but it's real. Luna: And that's attracting demand. I saw the five-year TIPS auction last month had a bid to cover ratio over 2.6 — highest in over a year. Lucas: That's the key number. When institutions are piling into TIPS auctions, it's a signal that the market thinks inflation isn't going to spike again, but it's also not going to disappear. The breakeven rate — that's the market's implied inflation expectation — has been edging down. It was 2.29 percent last week, now 2.26. So the market is pricing in a slow, sticky disinflation. Luna: Sticky disinflation — I like that. Still inflation, but less dramatic. And in that environment, what's the best hedge? Gold historically does well when inflation is accelerating, not decelerating. Lucas: Right, that's the historical pattern. Gold thrives on inflation surprises and real rates going negative. When real rates turn positive, gold loses some of its luster. And silver is even more volatile — it's down over one percent in the past five days. TIPS are a more direct play on this moderate inflation scenario. Luna: So for the listener who's been using gold or maybe just cash as their inflation hedge, are you saying they should look at TIPS now? Lucas: It depends on their time horizon and their tolerance for complexity. TIPS are not as simple as buying a gold ETF. The inflation adjustment is taxed as income even if you haven't sold, which creates a phantom tax issue in taxable accounts. But in a retirement account, that's not a problem. Luna: Phantom tax — that's the catch. You pay tax on the inflation adjustment each year, even though you don't get that cash until you sell or the bond matures. Lucas: Right. So TIPS are best suited for IRAs or 401s. But if you're in a high tax bracket and hold them in a taxable account, that negative cash flow can be a headache. Still, for the inflation protection they offer, many advisors think it's worth it. Luna: And what about the Fed's new posture? Chairman Warsh seems more hawkish than the market expected. The statement yesterday removed the cutting bias entirely. How does that feed into TIPS? Lucas: It's supportive for TIPS because higher nominal rates, if they stay high, keep real yields in positive territory. And if the Fed is serious about not cutting until inflation is truly tamed, then inflation expectations stay anchored. TIPS basically thrive on that combination — stable inflation expectations and positive real yields. Luna: So the old playbook — buy gold when the Fed is dovish — might need an update. This feels like a regime shift. Lucas: I think it might be. For the last fifteen years, we've been in a low-rate, low-inflation world, then a spike, and now we're settling into a higher-rate, moderate-inflation regime. The tools that worked in 2020 or 2022 may not work in 2026. TIPS are a good example of an instrument that was almost irrelevant for a decade and is now central to portfolio construction. Luna: Speaking of portfolio construction, and I know this is a bit of a pivot, but it's related — our show is ad-free and listener-supported. If you've found our TIPS conversation helpful, and you want to keep these episodes coming without commercial interruption, you can support us at buy me a coffee dot com slash fexingo. Lucas: Yeah, that support makes a real difference. It lets us spend time digging into these specific angles rather than chasing clicks. And honestly, the inflation landscape is changing fast enough that we want to keep bringing you the actionable details. Luna: Exactly. So back to TIPS — one more thing I wanted to ask. For someone building a bond ladder, how do TIPS fit into that structure? Lucas: They can replace the inflation-sensitive rung. Typically you'd have nominal Treasuries, corporate bonds, maybe some municipals. Adding a TIPS rung — say a five-year TIPS — gives you protection against unexpected inflation without sacrificing much yield. The current five-year TIPS yield is around 0.4 percent real, while a nominal five-year Treasury yields about 2.7 percent. The difference is the breakeven inflation rate — roughly 2.3 percent. So if inflation averages above 2.3 percent over five years, TIPS win. Luna: And most forecasts see inflation staying above 2.3 percent for the next couple years at least. So TIPS look like a good bet for that rung. Lucas: That's the case. The CPI is at 334 now, up from 332.4 last month. Core is even higher. Inflation is not dead — it's just less scary. TIPS are built for this exact environment. Luna: Alright, so TIPS: positive real yields, strong auction demand, and a Fed that's not in a rush to cut. That's a compelling combination. For the listener, the takeaway might be to check if your bond ladder or your retirement account has any TIPS exposure. Lucas: And if it doesn't, maybe it's worth a conversation with your advisor. The old objection — 'why would I want a negative real yield' — no longer applies. TIPS have crossed into positive territory. That's a genuine shift.