TIPS versus nominal Treasury bonds
Nominal Treasuries specify dollar payments. TIPS adjust principal for an inflation index. The decision begins with whether you want a particular dollar amount or a payment that responds to purchasing-power changes.
What breakeven inflation tells you
The commonly quoted breakeven spread subtracts a TIPS real yield from a nominal Treasury yield at a comparable tenor. A nominal 4% yield and real 2% yield produce an approximate spread of 2 percentage points.
Breakeven is useful market information, but it is not a pure inflation forecast. Inflation risk compensation, liquidity and other pricing effects matter. The Cleveland Fed's inflation-expectations research separates expected inflation and risk components using a broader model.
A simplified compounding comparison
Imagine investing $10,000 for ten years at a constant 4% nominal return, versus a constant 2% real return with inflation compensation. Assume annual compounding and identical reinvestment opportunities; ignore taxes, fees, coupon timing, CPI lag and the TIPS deflation floor.
| Assumed annual inflation | Nominal strategy: ending dollars | Real strategy: ending dollars |
|---|---|---|
| 1% | $14,802 | $13,465 |
| 2% | $14,802 | $14,859 |
| 3% | $14,802 | $16,382 |
These values use $10,000 × 1.04¹⁰ and $10,000 × (1.02 × (1 + inflation))¹⁰. They are mathematical scenarios, not quotes or forecasts for actual bonds.
Under this simplified convention, the exact matching inflation rate is 1.04 / 1.02 − 1 = 1.9608%. That differs slightly from the 2-percentage-point subtraction. Actual Treasury breakevens involve real instruments with their own conventions, so neither shortcut is a complete trade comparison.
Match the liability and horizon
A fixed dollar obligation can be evaluated against nominal cash flows. A spending target that should move with inflation can be evaluated against TIPS cash flows. If you sell either bond before maturity, changing yields and market prices can affect the proceeds.
Compare similar horizons and actual settlement prices. A ten-year real-yield reference and a shorter nominal security do not represent the same timing risk.
Taxes and personal inflation
Use after-tax cash flows where taxes affect the spending plan. TIPS principal adjustments can produce taxable income before principal is received, while different account types change the analysis. See the tax example.
Your household's inflation rate may differ from CPI. A payment indexed to the official measure will not track every individual expense exactly.
Apply the comparison
The yield history page shows dated real-yield and breakeven references. The homepage includes a simple nominal-versus-TIPS comparison with assumptions you can change. For planned retirement spending, start with the ladder walkthrough and read its limitations before interpreting a cost estimate.
