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Mechanics of Buying & Selling 5-Yr TIPS

edited April 2022 in Other Investing
With high inflation (CPI-U), it may be worthwhile to buy short-term/5-yr TIPS directly. Here are some basic and practical details.

5-yr TIPS are auctioned in April, June*, October, December*; those marked * are reopenings, not brand-new issues (see link for tentative schedule for 2022). Retail investors buy them noncompetitively in the multiples of $100s at Treasury Direct (TD; brokerages may have different multiples, say, 1,000s) up to $5 million. Basically, the auction determines a single clearing price relative to 100-par for all buyers, competitive (institutional, dealers) and noncompetitive (retail, institutional). All Treasuries have positive coupons, but TIPS have tiny/small coupons, and auction prices above par may easily lead to negative real rates.

Buying at Auction – You can do this via TD or brokerage account (and commission-free at major brokerages). Key dates are Announcement Date after which the buy orders can be entered up to the early morning on the Auction Date (but it is safer to enter buy orders the day before by midnight); Auction Date when the auction occurs in late mornings; Settlement/Issue Date when transactions are settled, and securities issued. Beware that money from your account will be gone on the morning of the Auction Date (not on the Settlement Date as is typical for normal brokerage transactions, and if money is not available, the order will be cancelled). One exception to this may be when you also have Treasuries in the same or greater amount(s) maturing in the auction week, and then your brokerage may indeed settle all Treasury events on the Settlement/Issue Date (but do check this in advance with your brokerage). It is convenient that Treasuries maturity dates coincide with the Settle/Issue dates for auctions during the auction week.

Buying/Selling in the Secondary Market – This can be done at any time at brokerages. Treasuries trade at tiny bid-ask spreads and major brokerages don’t charge commissions for trading Treasuries. If you hold Treasuries in your TD account, you have to transfer them out to your brokerage to sell them before maturity. TD accounts are just for buying at auctions and holding them to maturities.

Selling/Redeeming at Maturity – Your TD or brokerage account gets credited with the proceeds.

Taxes – Even though TIPS accumulate interest/coupon and inflation-adjustment and those are paid only at maturity, the IRS want to be paid annually. You will get 1099-INT for interest and 1099-OID for inflation-adjustment every year and those should be reported in your IRS 1040; Treasury securities are exempt from state and local taxes, so make appropriate adjustments to your State 1040.

Procedures are similar for other Treasury securities, e.g. for T-Bills (up to 1-Yr), T-Notes (1+ to 10 yrs), T-Bonds (10+ to 30 yrs). T-Bills don’t have coupons but are sold at discount to 100-par and mature at par (like Zero-coupon bonds).

Upcoming 5-Yr TIPS Announcement Date 4/14/22 (Thursday); Auction Date 4/21/22 (Thursday), Settlement/Issue Date 4/29/22 (Friday).

Upcoming 1-Yr T-Bill Announcement Date 4/14/22 (Thursday), Auction Date 4/19/22 (Tuesday), Settlement/Issue Date 4/29/22 (Friday)

TIPS, General
TIPS, Rates & Terms
Treasury Auction Schedule
Compare TIPS vs I-Bonds


  • @yogibearbull...thank you...that was well written...article worthy.
  • edited April 2022

    Because you included the announcement for 52 wk bills, I am presuming those are your preferred maturities at this time.

    Which of the Fidelity, Schwab, Vanguard, etc. brokerages is your preferred platform for buying (and later selling) Treasuries in the secondary market?

    Just an FYI - Earlier today, I had looked at the 2 yr Treasuries and for the same issue, I noticed the YTM offered at Schwab and Fidelity was (the same and) higher than that at Vanguard - 2.481% vs 2.468%. TD was 2.43%.

    Any thoughts?
  • edited April 2022
    @BaluBalu, I mentioned only 52-wk T-Bills and 5-yr TIPS for the upcoming auctions NEXT week. Also being auctioned NEXT week (but I didn't mention) are 4-wk, 8-wk, 13-wk, 26-wk T-Bills and 20-yr T-Bonds. So, you can say that among all those being auctioned NEXT week, my preference is for the two that I mentioned.

    2-yr T-Note would have to bought in the secondary market now, or you can wait for its auction in NEXT-NEXT week on 4/26/22 (see Treasury auction link in the OP). In the past, I have used both Fido and Schwab platforms for buying Treasuries. I don't have Vanguard Brokerage and am resisting conversion to one - a long story told elsewhere. The quotes you mentioned are from current bid-ask and until you enter your trade, you won't know what you got. In general, if there an auction nearby, I like to buy at auction.
  • edited April 2022
    Thanks, Yogi. I guess I will go with Fidelity, unless we get a feed back from others to the contrary.
  • edited April 2022

    The yield for 5-Yr. TIPS was -0.54% on 04-14-22.
    The yield for 5-Yr. Treasuries was 2.79% on 04-14-22.
    The corresponding 5-Yr. breakeven inflation rate is 3.33%.
    Assuming yields don't change much between now and the auction date,
    would you prefer to purchase 5-Yr. TIPS then or would you wait
    for potentially better opportunities in the future?
  • edited April 2022
    @Observant1, keep in mind the following.

    1. As mentioned elsewhere, 5-yr TIPS now are 2nd best to I-Bonds. So, it for those who had their max fill for I-Bonds or who won't buy I-Bonds.

    2. Individual TIPS do tap into month-over-month changes in CPI-U that is very high now and unsustainable: Jan +0.841%, Feb +0.913%, Mar +1.335%. Look at -0.54% real yield as monthly cost of 54 bps/12 = 4.5 bps only. BTW, I-Bonds tap into semi-annual change in CPI-U.

    3. There is TIPS auction on this Thursday (4/21/22), so the time to act on it is short.

    4. If the CPI-U growth slows down, as it must, sell TIPS or stick with them for 5 years (that may still turn out OK). As for what the current data are saying about inflation-expectations for 5 years, we will find that out in 5 years. But this idea here is to tap into the inflation wave for months, not years.
  • edited April 2022

    I was looking at 5-Yr TIPS from the perspective of the breakeven inflation rate.
    Except for the past few weeks, it appears this rate is the highest it's ever been (earliest data - 01/02/2003).
    Per your comments, recent monthly CPI-U changes have been very high.
    Holding 5-Yr TIPS for several months in this environment seems like a sensible strategy.
    BTW, I've accumulated a good-sized position in I-Bonds over the years.
    Thanks for your detailed response!

  • edited April 2022
    I had an order at Schwab for 5-yr TIPS auction that was today. As I remembered from my prior experience a couple of years ago for buying T-Bills at Schwab, money was taken out from my account TODAY about 1/2 hour past Noon. So, Schwab didn't wait for the Settle day 4/29/22 tomorrow.

    If I had some Treasuries maturing this week, I think Schwab would have waited to settle everything tomorrow. All Treasuries maturing or auctioned this week will Settle on Friday.

    I bought I-Bond in January in Trust a/c. I could open another individual Treasury Direct a/c, but I decided to use the 2nd best 5-yr TIPS route & also test things out. My TIPS purchase was far far far... smaller than $5 million (-:).
  • edited April 2022
    You have been right about your inflation expectations expressed through your iBond purchases, starting last year. Glad I followed you into them.

    From your TIPS purchase, I am deducing that you think that inflation expectation expressed by market in the 5 Yr TIPS is going to surprise to the upside. To my surprise, the current 5 year breakeven rates at 3.36% are lower than they were in March.

    BTW, settlement for today's 5 yr TIPS auction is next Friday - a week +1 day from auction.
  • edited April 2022
    Thanks. I modified the post.
  • So, Schwab is using your money for 8 days for free on a trade. I think that is egregious in principle, notwithstanding zero rates on their cash products. If it is a margin account with no idle cash, would they charge margin interest between today and April 29, the settlement date, assuming you deposit cash into the account on April 29?

    Makes me not to want to buy Treasuries at Schwab.

    Thanks for sharing.
  • @BaluBalu, clearly, it is important when the money is taken from the account for Treasury Auctions, whether on the Auction Day or the Settlement Day. We know that for Treasury trades in the secondary market, money will be taken out on trade-settle day (as for most brokerage trades).

    Schwab took the money out on the Auction day for online Treasury/TIPS order.

    Somebody may know it already for Fido online Treasury Auction orders. You Fido Rep said that for Treasury FRNs that don't allow online orders at Fido for Auctions, you can provide money until the Settlement Day. Confirm this if you do go through with your FRN Auction order. Also, whether there was any broker-assisted-trade fee.

    Treasury Direct (TD) says that the money will be taken out by the Settlement Day, but what is the actual experience? I know that for I-Bonds, TD was very aggressive and took the money out on the morning of the next business day (it didn't wait until the end-of-the-day or the next day as I had expected).

    I am aware of inflation-"expectations". Individual TIPS held to maturity do capture CPI-U month-to-month changes and those are going gangbusters now. Changes don't have to be high, but just positive AND persistent (for long enough). If there was a shorter-term for TIPS at Auctions, I would go for that, but 5-yr TIPS are the shortest maturities available. TIPS in the secondary market would introduce other market factors. I will know in 5 years how my 5-yr TIPS experiment went - either good or dead money. BTW, next 5-yr TIPS Auction is on June 23, 2022 (I wouldn't mess with 10-yr TIPS, but their Auction is on May 19, 2022).

    FRED Inflation-"Expectations"
    FRED CPI-U (Unadjusted)
    FRED CPI-U (Unadjusted), Month-to-Month changes
  • A bit off topic, but can you move I bonds from TD to a brokerage account?
  • @sma3, no.

    Only Treasury Direct can hold electronic I-Bonds.

    If you have paper I-Bonds, you can hang on to them and hold them in bank locker.

    But TIPS can be held at Treasury Direct or brokerages.
  • Thanks. I saw your answer on the other thread too.
  • Thanks for sharing your thinking @yogibearbull. I think you will make money on your buy and hopefully, the coupon is healthy enough for you to hold to maturity. I have decided not to buy FRNs because of negative spread rate but instead plan to buy the index rate, 13 wk, at auction and renew at maturity, if desirable. I shall post how I am required to fund the buy.
  • edited April 2022
    I just placed a buy order for the 13 wk Treasury for the Monday auction. The current equity in my account is negligible and I will be initiating an ACH deposit into that account on Monday to fund the buy by the settlement date. The Fidelity rep confirmed even if the money comes into the account before settlement, the account will not be debited until the settlement date and there will not be margin interest charged between auction date and settlement date.
  • edited June 2022
    Upcoming 5-Yr TIPS Auction

    Announcement Date 6/16/22 (Thursday)
    (Purchase at Brokerages or Treasury Direct from afternoon until the morning of the Auction Date)

    Auction Date 6/23/22 (Thursday)

    Settlement Date 6/30/22 (Thursday)

    Edit/Add: Announcement, 6/16/22,

  • With the preface, that I am a novice at TIPs, having thought them overpriced for so many years. --- so please pardon the following questions... I am dipping my toe in them now (via ETFs), since the general sell-off in bonds.

    1.What is the rationale to buy individual TIPs vs an ETF. -- And especially VTIP, which holds short-term TIPs? any reason other than one has a finite duration instrument when buying the bond directly?

    2. As I look at Fidelity's list of 2ndary-market TIPs, it appears shorter-term TIPs are still priced high with negative real-yields, while longer-term TIPs do have a modest (meager) posiitve real-yield. -- So why not go for longer-duration, especially, since the inflation-adjustment feature should serve as a mitigant to the longer duration?

    3. More generally, as regards constructing the Treasury sleeve of one's portfolio, mightn't it make sense to populate the longer-duration portion of one's holdings with TIPs, rather than nominal bonds? --This would serve to protect one's buying power in the "outer years". And because TIPs are still risk-free (i.e. issued by Uncle Sam), they still seem to benefit from a flight to quality during risk-off periods. - I guess my point is if one is going to own ANY longer-duration Treasurys here, wouldn't TIPs have the edge over nominal bonds?

    Thanks in advance for sharing your thoughts/comments on the above.
  • edited June 2022

    #1 - I started a thread on TIPS vs TIPS funds. It had dozens of views but no comments. Click Update to refresh the chart link there.

    #2 - Treasury site is showing only -0.02% real yield for 5-yr TIPS. Think of that as 2 bps cost.

    3# - Both short-term TIPS and long-term TIPS will get the SAME inflation-adjustments. So, if buying TIPS for current high inflation, why add more rate sensitivity? Only 5-yr, 10-yr and 30-yr TIPS have Treasury auctions. If there was, say, 2-yr TIPS auction, I would go for that. New issue TIPS held to maturity have advantages over those traded in the secondary market. The idea would be to hold them to maturity but if one had to absolutely access that money, one COULD sell them in the secondary market (at brokerages only).
  • FWIW, Fidelity has a TIPs index fund (FIPDX) with extremely low expenses and low to moderate duration.
  • OK, thanks gentlemen.
  • Regarding Fidelity’s TIPs index fund, FIPDX, does anyone know why the fund only makes yearly, instead of monthly, distributions? This seems odd for a bond fund. Thanks. Mike
  • edited June 2022
    Vanguard TIPS funds distribute quarterly.

    Fido FIPDX says monthly (website and prospectus) but they were $0 for March, April, and $0.000000001 (I think I counted 0s right) for February and May (-:).
  • By making ridiculously small quarterly distributions is FIPDX playing the system by claiming to make quarterly distributions when in reality they only do it once a year in December? Wouldn’t that be considered deceptive sales tactics?

    Thanks Yogi for your insight.

    PS - I ask because it is one of the funds offered in my 401(k) plan. I own it.
  • Checking out TIPs (and bonds) performance for the past 10 years -- which coincidentally is where Portfolio Vizualizer shows to be FIPDX's commencement, annual CAGRs for TIP, VIPIX & FIPDX clock in at 1.83%-1.94%. The CAGR of the general bond market (VBMFX) was 1.54% (all through May 2022).

    By replacing FIPDX in PortViz with TLT (nominal LT Trsys), history goes back to 2004. TIP CAGRs were 4%, VBMFX was lower at 3.27%. TLT was 5% --- but with materially greater volatility vs both TIP & VBMFX.

    Looking forward, unless one's view is that deflation will take hold, TIPs, post-bond selloff, strike me a marginally more attractive than nominal Trsys.

    Opinions, pro or con?
  • @mnzdedwards, TIPS have low coupons and funds have ERs, so there may not be any income left to distribute every month even when the policy for FIPDX is monthly distributions. Inflation-adjustments (to principals) probably hit quarterly and they may be distributed quarterly or annually - even if the fund has to sell some holdings when there aren't enough inflows. So, there is nothing fraudulent. OEFs typically don't have managed-distribution policies.
  • Excellent explanation Yogi. Thank you. I appreciate it. I was confusing the inflation adjustment (which is to principal) and not considering the low coupon rates on the bonds themselves. Well explained. Thank you.
  • edited June 2022

    Somewhat OT.

    At this point, is 2 yr Treasury or 1 yr Treasury a better bet? When I bought 2 yr notes in April/May, my idea was roll down potential. Now, 1 yr yields only 40 basis points lower than 2 yr. You can PM me as well. Thanks.
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