TIPS yields are giving inflation-wary investors a rare opening

Inflation-protected Treasury bonds are flashing a rare sweet spot for savers, according to MarketWatch columnist Mark Hulbert: real yields are positive and sitting well above their 10-year averages.

In a July 15 column, Hulbert argued that investors may be misreading the bond market if they focus only on current inflation and nominal interest rates. The key issue, he wrote, is how real interest rates are measured.

Hulbert said the popular view that real rates turned negative as inflation worsened earlier this year may fit very short-term rates, such as the federal-funds rate set by the Federal Reserve. For Treasury maturities of one year or longer, he said, real rates should be judged against expected inflation, not inflation that has already happened.

Real yields are above average

Using inflation expectations from the Federal Reserve Bank of Cleveland’s model, Hulbert said current real yields are not just above zero. They are higher than their 10-year norms.

The 10-year real yield was recently 2.1%, according to Hulbert’s analysis, compared with a 10-year average of 0.9%. The 1-year real yield stood at 2.2%, versus a 10-year average of 0.3%.

The nominal market rates cited in the column included a 1-year Treasury bill at 3.975% and a 10-year Treasury note at 4.562%.

Hulbert’s takeaway was direct: it may be an unusually favorable moment to buy U.S. Treasury inflation-protected securities, known as TIPS, particularly through a ladder that locks in yields across multiple maturities.

A 30-year ladder shows a bigger payout

According to TipsLadder.com figures cited by Hulbert, a 30-year TIPS ladder currently offers a guaranteed inflation-adjusted withdrawal rate of 4.8% annualized over the next three decades. The same data showed an annualized real yield of 2.7%.

Earlier in the decade, Hulbert said, the comparable inflation-adjusted withdrawal rate was just over 4.0%.

The appeal, as Hulbert framed it, is that a TIPS ladder fixes the return above inflation. Once the ladder is in place, the investor’s real payout does not depend on whether future inflation comes in above or below the Cleveland Fed model’s forecast.

That does not remove every uncertainty. Hulbert acknowledged that the case rests partly on inflation forecasts, and forecasts can miss.

Still, he pointed to the Cleveland Fed’s model as more than a casual guess. The bank says its inflation-expectations model uses Treasury yields, inflation data, inflation swaps and survey-based measures of inflation expectations.

Markets are doing the guessing too

Hulbert also noted that inflation swaps, one of the model’s inputs, are traded in a global market with total notional value in the trillions of dollars. These contracts pay out based on inflation outcomes.

The TIPS market itself, another input in the model, is estimated at $2 trillion, according to the column.

Hulbert said traders in both markets price tiny changes in expected inflation, even down to a single basis point, or 0.01 percentage point. His argument: investors betting heavily against those signals should recognize they are taking the other side of markets where large sums are at stake.

Hulbert is a regular MarketWatch contributor. His Hulbert Ratings service tracks investment newsletters that pay a flat fee to be audited.

This story draws on original reporting from MarketWatch.