Chapter 9: TIPS, I bonds, and inflation
Every Treasury in Chapters 3 and 4 promises dollars: a number printed today, delivered on schedule, worth whatever dollars happen to be worth by then. Two products on the same federal shelf promise something rarer, purchasing power. In June 2026 the 10-year TIPS pays inflation plus 2.16%, real (Treasury real yield curve, June 11, 2026), and the I bond pays a 4.26% composite rate for bonds issued May through October 2026 (TreasuryDirect). This chapter explains how each one keeps that promise, what each costs in taxes and lockups, and then lets Dev decide whether either belongs anywhere near his house down payment.
TIPS in plain words
TIPS, Treasury Inflation-Protected Securities, are Treasury notes and bonds whose principal adjusts with the consumer price index, the government's main inflation gauge, usually shortened to CPI. Buy $10,000 of TIPS, and suppose inflation runs 3% over the next year: your principal gets marked up to about $10,300, and because the coupon is a fixed percentage paid on the adjusted principal, the dollar interest grows along with it. The quoted yield on a TIPS is therefore a real yield, the part you earn on top of inflation, whatever inflation turns out to be. A deflation floor rounds out the deal: at maturity you receive no less than the original principal, even if falling prices marked it down along the way.
That floor operates at maturity and only at maturity. In between, TIPS trade at prices like any other Treasury, and the Chapter 2 seesaw works on real yields exactly the way it works on regular ones: when real yields rise, existing TIPS prices fall. TIPS are inflation-protected, never price-protected, and the distinction decides who should own them.
What does the breakeven actually tell you?
Subtract the TIPS real yield from the regular Treasury yield of the same maturity and you get the breakeven: with the 10-year nominal at 4.45% and the 10-year TIPS at 2.16% (both Treasury, June 11, 2026), the breakeven is 2.29%. Read it as the inflation rate at which the two bonds finish in a dead heat over the decade. If inflation averages above 2.29%, the TIPS wins, because its adjustments outrun the gap it gave up in headline yield. If inflation averages below 2.29%, the regular Treasury wins. The breakeven is the market's posted inflation guess, refreshed every trading day, and like every market guess it is an average of opinions rather than a forecast with a warranty. The practical use is comparison shopping: you do not need to predict inflation precisely, you only need to decide whether your own guess sits above or below the posted number.
The calculator below runs your guess instead of the market's. Its defaults are dated June 11, 2026: the 10-year nominal at 4.45% and the 10-year TIPS real yield at 2.16%, both from the Treasury's daily curves, for a breakeven of 2.29%. At the default inflation guess of 2.50%, TIPS deliver about 4.66% against the nominal's 4.45%, putting TIPS ahead by 0.21 points under that guess. Type a guess below 2.29% and the regular Treasury moves in front, which is the whole lesson in one slider.
Buying TIPS works the same way Chapter 3 taught for every marketable Treasury. TreasuryDirect sells them at auction in $100 increments with noncompetitive bids that always fill, brokerages offer the same auctions plus the secondary market, and TIPS funds wrap the whole maturity range into one ticker for savers who would rather hold the category than a particular bond. The fund route inherits the fund tradeoff from Chapter 8: no maturity date, so no year when the deflation floor or the face value is contractually yours.
The phantom income footnote
TIPS carry one tax wrinkle worth knowing before you buy them in a regular brokerage account. The yearly principal adjustments count as taxable interest in the year they happen, even though the cash they represent arrives only at maturity. Savers call it phantom income: a tax bill on money you can see on a statement and cannot yet spend. Retirement accounts dodge the problem completely, since nothing inside an IRA or 401(k) is taxed year by year, which is why many households keep their TIPS there on purpose. The full treatment of TIPS taxation, including the paperwork, belongs to the Finvest Tax Playbook.
I bonds, the savings cousin
I bonds are savings bonds rather than marketable Treasuries, which changes nearly everything about how they behave. They never trade, so they have no price and no seesaw; the deal is between you and the Treasury alone. Their rate comes in two parts: a fixed rate that stays with the bond for its whole life, plus an inflation piece that resets every six months. For bonds issued May through October 2026, the composite rate is 4.26%, built on a 0.90% fixed rate (TreasuryDirect). The rules arrive as a package, and every one of them matters. You can start with as little as $25 at TreasuryDirect, you can buy at most $10,000 per person per calendar year, you cannot touch the money for 12 months, redeeming before five years costs the last 3 months of interest, and since 2025 the bonds are electronic only.
| Product | The promise | Price wiggle | Locks and limits |
|---|---|---|---|
| 13-week T-bill, 3.73% (June 8, 2026 auction) | Dollars, in weeks | Tiny, gone at maturity | $100 minimum, no caps |
| 10-year TIPS, 2.16% real (June 11, 2026) | Inflation plus 2.16% if held to maturity | Full seesaw in between | Phantom income in taxable accounts |
| I bond, 4.26% composite (May through October 2026 issues) | Inflation plus a 0.90% fixed rate | None, it never trades | 12-month lock, 3-month haircut before year 5, $10,000 a year |
One honesty note about that 4.26%: only the 0.90% fixed piece is yours for the life of the bond. The inflation piece resets every six months, so the composite you see this season says nothing about the composite next year. Buying an I bond for its current headline is buying a six-month number and holding a thirty-year instrument.
Against bills, the contest comes down to timing and ceilings. A 26-week bill paid 3.81% at the June 2026 auctions, with no cap, no lock, and the state-tax exemption both products share. The I bond's 4.26% composite (May through October 2026 issues) beats that today, holds the edge for only six months at a time, and asks for a 12-month commitment in return. For money that might be needed inside a year, the auction board wins on access alone.
Dev prices his down payment
Dev's down-payment fund has one rule, no gambling, and a target roughly two years out. He gave both inflation products a fair hearing against that calendar. The 10-year TIPS failed the seesaw test first: 2.16% real (June 11, 2026) is a fine promise for someone holding ten years, but a rise in real yields would mark the price down in exactly the season he writes the biggest check of his life. The I bond came closer, with no price wiggle at all, and then the rules bit: 12 months untouchable, a 3-month interest haircut at his two-year exit, and a $10,000 annual cap that covers only a slice of the fund anyway. So the house money stays on the Chapter 4 ladder, where every rung has a date that matches a calendar he controls. The breakeven run still paid for itself, just on a different shelf: his Roth IRA holds retirement money with a multi-decade horizon and a liability measured in groceries rather than dollars, and inflation plus 2.16% real with no phantom income is precisely the right promise for that jar.
Match the promise to the liability. Spending that lives far away and grows with prices suits TIPS and I bonds. Money with a near date wants bills. And never buy this year's I bond for last cycle's headline rate, because the headline resets in six months and the fixed rate is the only part that stays.
Where people go wrong
- Treating TIPS as price-stable. The protection covers inflation, never rate moves. When real yields rise, TIPS prices fall, and a holder who needs to sell early can lose money in a high-inflation year anyway.
- Chasing the composite headline. The I bond's inflation piece resets every six months. The durable part of the May through October 2026 offer is the 0.90% fixed rate, and that is the number worth comparing across seasons.
- Holding TIPS in a taxable account by accident. Phantom income taxes the adjustment years before the cash arrives. Retirement accounts make the problem vanish; placement is half the decision.
- Parking the emergency fund in I bonds. An emergency that arrives in month eight meets a 12-month lock. Locked money is not emergency money, whatever it yields.
- Confusing the breakeven with a forecast. The 2.29% (June 11, 2026) is the market's posted average guess. Use it as the line your own guess must beat, never as a promise about the next decade.
Key takeaways
- Regular Treasuries promise dollars; TIPS and I bonds promise purchasing power. In June 2026 the 10-year TIPS pays inflation plus 2.16% real (Treasury, June 11, 2026).
- The breakeven is the nominal yield minus the real yield: 4.45% minus 2.16% gives 2.29% (June 11, 2026). Guess higher and TIPS win; at the calculator's default 2.50% guess, TIPS deliver about 4.66%, ahead by 0.21 points.
- TIPS adjustments are taxed yearly in taxable accounts before the cash arrives; retirement accounts dodge the phantom income entirely.
- I bonds pay a 4.26% composite on a 0.90% fixed rate for May through October 2026 issues, with a $10,000 annual cap, a 12-month lock, and a 3-month haircut before year five.
- Real instruments suit real liabilities far away; bills suit near dates. Dev's house money stayed on the ladder, and his Roth took the TIPS.
Sources: Treasury daily yield curves · TreasuryDirect I bonds · TreasuryDirect auction results · TreasuryDirect tax treatment · IRS Topic 403, interest income · Finvest Tax Playbook