Hello, YieldAlley readers! In this issue:
TIPS, Tariffs and Inflation in 2025: An Investor's Guide to Treasury Inflation-Protected Securities
U.S.-China Tariff Suspension Drives Strong Market Rally
How Much Do You Need to Make to Buy a Home in 2025?
And more!
NEWS
Standout Stories
💰 Why ignoring market dips can double your wealth (Vanguard)
⏱️ The Sunk Costs of Market Timing (A Wealth of Common Sense)
🪆 This gremlin-looking toy from China is proving to be tariff-proof (CNN)
👌 How to Prepare Your Portfolio for a Recession (Morningstar)
🙏 Handling requests for advice from friends and family (Investment Talk)
MARKET THOUGHTS
U.S.-China Tariff Suspension Drives Strong Market Rally
ECONOMY
Inflation showed signs of cooling in April with CPI rising 2.3% year-over-year, below expectations of 2.4% and marking the slowest annual pace since early 2021. The Producer Price Index unexpectedly declined 0.5% month-over-month, compared to estimates for a 0.2% increase, with companies appearing to absorb some tariff costs through margin compression. Retail sales growth decelerated sharply to just 0.1% in April following March's robust 1.7% gain, suggesting consumers may be tempering spending after March's pre-tariff buying rush. Consumer sentiment continued its downward trend, declining for the fifth consecutive month to 50.8 in May from 52.2 in April, with nearly three-quarters of consumers spontaneously mentioning tariffs as a concern.
STOCKS
U.S. equities posted strong gains as markets responded positively to the U.S.-China agreement to suspend most recently implemented tariffs for 90 days while negotiations continue. The Nasdaq Composite led major indexes with a 7.15% advance, while the S&P 500 gained 5.27% and the Dow Jones Industrial Average rose 3.41%. Small- and mid-cap stocks maintained their momentum with the S&P MidCap 400 and Russell 2000 recording their sixth consecutive week of positive returns. By Friday's close, most indexes had recovered to levels above their April 2 positions, bolstered by additional trade developments including a new agreement allowing Saudi Arabia to purchase advanced AI chips from U.S. companies.
FIXED INCOME
Treasury yields fluctuated throughout the week in response to economic data, generally ending higher across most maturities and resulting in negative returns. Municipal bonds outperformed Treasuries despite facing headwinds from Treasury market weakness and heavy issuance toward week's end. Investment-grade corporate bonds posted modest gains, outperforming Treasuries in the risk-on environment. High yield bonds also traded higher amid the equity rally fueled by positive trade headlines, with traders noting solid demand for new issues during the week.
INCOME BUILDING
TIPS, Tariffs and Inflation in 2025: An Investor's Guide to Treasury Inflation-Protected Securities
As inflation concerns and recent tariff volatility have dominated financial headlines in 2025, more investors are exploring Treasury Inflation-Protected Securities (TIPS) as a way to safeguard their portfolios. Despite modest inflows in early 2025 compared to last year, these government-backed securities remain one of the most direct hedges against unexpected inflation. This guide breaks down how TIPS work, their performance in today's market, and how to determine if they belong in your portfolio.
What Are TIPS and How Do They Work?
Treasury Inflation-Protected Securities are U.S. government bonds designed specifically to protect investors from inflation. Unlike conventional Treasury bonds, TIPS have a unique mechanism: their principal adjusts based on changes in the Consumer Price Index (CPI).
Here's how the mechanics work:
Principal Adjustment: When inflation rises, your principal increases. When inflation falls (deflation), your principal decreases.
Fixed Interest Rate: The interest rate is fixed at auction and remains unchanged throughout the life of the bond.
Interest Payments: While the rate stays constant, your interest payments vary because they're calculated based on the adjusted principal amount.
Principal Protection: At maturity, you receive either your original principal or the inflation-adjusted principal, whichever is higher, meaning you're protected from deflation.
TIPS are issued with 5-year, 10-year, and 30-year maturities, with regular auctions throughout the year.
TIPS Performance in 2025
Through April 2025, TIPS have performed relatively well compared to the broader bond market. Broad TIPS funds like the Schwab US TIPS ETF (SCHP) have outperformed total bond market funds by approximately one percentage point. This outperformance largely stems from Treasury bonds holding up better during the market volatility experienced in early 2025.
TIPS funds have seen modest inflows of about $3.7 billion in the first four months of 2025, a shift from the $2.2 billion outflow during the same period in 2024. However, this represents only about 1-2% of the total $230 billion invested in inflation-protected bonds, suggesting investors aren't rushing into inflation protection despite recent tariff concerns.
The current breakeven inflation rate for 10-year TIPS is around 2.3%, meaning the market expects inflation to average 2.3% annually over the next decade.
How TIPS Work in Practice: A Real Example
Let's illustrate how TIPS work with a simple example. Assume you purchase $10,000 in 5-year TIPS with a fixed interest rate of 1.0% while inflation is running at 2.5% annually.
Year | Starting Principal | Annual Interest Rate | Annual Inflation | Inflation-Adjusted Principal | Annual Interest Payment |
|---|---|---|---|---|---|
1 | $10,000.00 | 1.00% | 2.50% | $10,250.00 | $102.50 |
2 | $10,250.00 | 1.00% | 2.50% | $10,506.25 | $105.06 |
3 | $10,506.25 | 1.00% | 2.50% | $10,768.91 | $107.69 |
4 | $10,768.91 | 1.00% | 2.50% | $11,038.13 | $110.38 |
5 | $11,038.13 | 1.00% | 2.50% | $11,314.08 | $113.14 |
After 5 years, your $10,000 investment would grow to $11,314.08, with $538.77 in interest payments plus $1,314.08 in principal adjustment due to inflation.
Now, consider what happens in a deflationary scenario with -1.5% annual inflation:
Year | Starting Principal | Annual Interest Rate | Annual Inflation | Inflation-Adjusted Principal | Annual Interest Payment |
|---|---|---|---|---|---|
1 | $10,000.00 | 1.00% | -1.50% | $9,850.00 | $98.50 |
2 | $9,850.00 | 1.00% | -1.50% | $9,702.75 | $97.03 |
3 | $9,702.75 | 1.00% | -1.50% | $9,557.21 | $95.57 |
4 | $9,557.21 | 1.00% | -1.50% | $9,413.85 | $94.14 |
5 | $9,413.85 | 1.00% | -1.50% | $9,272.64 | $92.73 |
In this scenario, you would still receive your original $10,000 principal at maturity (not the $9,272.64), plus $477.97 in interest payments over the five years.
Understanding "Unexpected Inflation" and Break-Even Rates
One crucial concept that's often misunderstood: TIPS protect against unexpected inflation, not just any inflation. The current TIPS market is already pricing in expected inflation of about 2.3% annually. If actual inflation matches this expectation, TIPS won't outperform regular Treasury bonds of the same maturity.
This leads us to the concept of the "break-even inflation rate"—the inflation rate at which TIPS and regular Treasury bonds of the same maturity would provide equal returns. Currently, if you believe inflation will exceed 2.3% annually over the next decade, TIPS would theoretically outperform regular 10-year Treasury bonds. If inflation comes in below 2.3%, regular Treasury bonds would be the better choice.
Who Should Consider TIPS?
TIPS make the most sense for:
Retirees or near-retirees: Individuals who need capital preservation and are concerned about inflation eroding their purchasing power.
Investors saving for a specific goal: Those who want to ensure inflation doesn't diminish the real value of their savings.
Those with strong inflation views: Investors who believe inflation will exceed the market's current expectations.
For most investors, TIPS should represent one component of a diversified fixed-income portfolio rather than the entirety of it. Many target-date funds incorporate TIPS as retirement approaches, but typically alongside other bond types.
How to Buy TIPS in 2025
You have several options for investing in TIPS:
Direct purchase through TreasuryDirect: Buy newly issued TIPS at auction with no fees.
Brokerage firms: Purchase individual TIPS on the secondary market.
TIPS ETFs and mutual funds: Gain diversified exposure to TIPS of various maturities.
For most individual investors, TIPS ETFs offer the most convenient way to access this asset class. They provide diversification, professional management, and easy trading, though they do charge management fees.
Some popular TIPS ETF options include:
Schwab TIPS ETF (SCHP): A broad TIPS ETF that holds TIPS across various maturities with a low 0.03% expense ratio.
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP): Focuses on TIPS with maturities of less than 5 years, also with a 0.03% expense ratio.
iShares TIPS Bond ETF (TIP): One of the largest and most liquid TIPS ETFs with a 0.19% expense ratio.
PIMCO 15+ Year US TIPS Index ETF (LTPZ): For those seeking longer-duration TIPS exposure with a 0.20% expense ratio.
Tax Considerations
An important consideration: TIPS have unique tax implications. While TIPS are exempt from state and local taxes, both the interest payments and the inflation adjustments to principal are subject to federal income tax in the year they occur, even though you don't receive the principal adjustments until maturity. This creates "phantom income" that can surprise unprepared investors.
For this reason, many financial advisors recommend holding TIPS in tax-advantaged accounts like IRAs or 401(k)s to avoid annual taxation on phantom income.
TIPS vs. Other Inflation Hedges
TIPS are just one tool among many for inflation protection. Other options include:
Series I Savings Bonds (I Bonds): These offer similar inflation protection with some different features, including purchase limits and tax advantages. Learn more about the differences between TIPS and I Bonds.
Floating Rate Treasury Notes: These adjust with short-term interest rates, which often increase during inflationary periods. Learn more about FRN ETFs.
Short-term bonds: These naturally have less inflation risk due to their shorter maturities.
The Bottom Line
TIPS provide a government-backed way to protect against unexpected inflation, which can be particularly valuable in today's uncertain economic environment. However, they're not a silver bullet for all investors or all scenarios. Understanding the mechanics, tax implications, and alternatives helps ensure TIPS play an appropriate role in your portfolio strategy.
As with all investment decisions, consider consulting with a financial advisor to determine how TIPS might fit into your specific financial plan and inflation expectations.
INCOME BUILDING
Cash Rates
Government Money Market Funds (7-Day Yields)
SNVXX (Schwab Government Money Fund - Investor Shares): 4.03%
SPAXX (Fidelity Government Money Market Fund): 3.94%
TTTXX (BlackRock Liquidity Funds: Treasury Trust - Institutional Class): 4.17%
VMFXX (Federal Money Market Fund): 4.21%
Brokered CD Rates (6-Month Rate)
Charles Schwab: 4.14%
E*Trade: 4.25%
Fidelity: 4.25%
Merrill Edge and Merrill Lynch: —
Vanguard: 4.25%
ETFs (30-Day Yields)
SGOV (iShares 0-3 Month Treasury Bond ETF): 4.18%
BIL (SPDR Bloomberg 1-3 Month T-Bill ETF): 4.12%
USFR (WisdomTree Floating Rate Treasury Fund): 4.29%
TFLO (iShares Treasury Floating Rate Bond ETF): 4.31%
DEALS AND BONUSES
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Our Thoughts
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Picture of the Week
