By Brett Arends
The April 2032 inflation-protected U.S. TIPS bond looks like a pretty good deal
Here's an appealing option for investors who want low risk.
No matter how bad the finances of the U.S. federal government are these days - and they're pretty bad - we can probably count on Uncle Sam making it to 2032 without an outright default on his obligations.
Which means that the April 2032 inflation-protected U.S. TIPS 3.375% bond 912810FQ68 looks like a pretty good deal - especially amid the current bond-market freakout.
The bond, an obligation backed by the &#34;full faith and credit&#34; of the United States government (such as it is), has a so-called &#34;real yield&#34; right now of 1.63%. That means that each year it will pay the holder, through a combination of interest payments and principal adjustment, the current rate of inflation plus another 1.63%.
The Survey of Professional Forecasters just came out with the latest numbers, and they are now predicting the U.S. consumer-price index will rise 3.5% over the full course of this year.
If anything, that looks remarkably optimistic. Prices are currently rising at an annualized rate of 7.4%, and the Cleveland Fed predicts the inflation rate for this quarter will come to 6.9% on an annualized basis. But you don't get or keep a job as a &#34;professional forecaster&#34; by sticking your neck out, so their expectations will presumably adapt to reality slowly.
Even if the CPI rises just 3.5% this year, that will mean a 5.1% yield on the 2032 TIPS bonds, or $5,100 on a $100,000 investment. That would include a $3,100 coupon and $2,000 in principal adjustment.
Next year's yield would be 1.63% on top of whatever inflation turns out to be in 2027. The professional forecasters don't know what that will be, nor does anybody else.
But an investor's risk here is minuscule. A six-year bond can still endure price volatility, but if you buy the bond and hold it until April of 2032, you are guaranteed to enjoy compound annual returns of 1.63% a year plus annual inflation over that period.
The Congressional Budget Office publicly predicts inflation to average 2.3% over that period. If they're right, that would produce annualized returns on the bond of 3.93% a year over that stretch. I don't know many people outside the CBO who think inflation is going to average just 2.3% over the next six years, and I wonder how many people inside the CBO expect that, either. The CBO's forecast was made in February, before Israel and the U.S. attacked Iran and oil prices doubled.
The only material risk is that the U.S. government formally defaults on its debts before 2032. Even the gloomiest prognosticator thinks a formal default is highly unlikely, and the idea that it might happen within six years is in the very outside realm of risk. Maybe most important of all, if - repeat: if - such a calamity did actually occur, 2032 TIPS would almost certainly fall less far than almost anything else you can think of. The consequences for global stock markets would be spectacular.
If you think the federal government can make it to 2040 without defaulting on its debts, the February 2040 TIPS 2.125% bond 912810QF84 is paying 2.37% plus inflation at the moment, which means it's on track for a 5.87% yield this year. But the longer the bond, the more volatility, and more than half of that yield is expected to come from principal adjustments rather than coupons. That doesn't make it bad, just more complicated and less certain.
If you aren't interested in buying individual bonds, those seeking shelter from the turmoil in the bond market may be best off looking at index funds that invest in inflation-protected TIPS bonds, and especially those that invest in short-term TIPS, such as Vanguard Short-Term Inflation-Protected Securities VTIP.
Why are we talking about a possible default by the U.S. government? Washington, D.C., continues to dance on the deck of the Titanic, but the bond market is starting to grow worried about the water level down below. The official U.S. national debt is now equal to 100% of annual gross domestic product and is expected to rise to 120% by 2036. But that doesn't include the unofficial national debt, consisting of the IOUs already written to the Social Security and Medicare Part A trust funds, which equal another 100% of GDP.
If you look at the appendix of the Medicare trustees' annual report, on page 216 you will see that they estimate the true size of the unofficial national debt, including all obligations to Social Security and Medicare over the next 75 years, to have a present value of $88 trillion. So by that calculation, the federal government's obligations are about 400% of GDP.
Germany's (official) national debt is half its GDP - as was America's until the debt orgy of the past 20 or so years. As a result, the global bond market will lend money to Germany for 20 years at a real yield of just 1.3%, or half the real interest rate it charges the U.S. over the same period. Bond investors are more confident they will get their money back from Berlin than from Washington.
I was ruminating on this while I attended a Washington, D.C., conference this week where members of the governing elite, including a cabinet secretary, were indulging in open laughter about the supposed folly and stupidity of the German government. The smugness, arrogance and hubris in this city is so thick you could cut it with a knife.
The likeliest outcome of the debt crisis is probably a big dose of inflation, which is a sort of default by stealth, coupled with moves to start means-testing Medicare and Social Security. No one will agree to raise taxes meaningfully so long as the children in charge continue to engage in fairy tales about mythical trillions of dollars in fraud that can be cut from federal spending. Last year it was Elon Musk. This year it's J.D. Vance. Next year perhaps it will be the ghost of Chico Marx with his immortal line, &#34;Who are you gonna believe - me or your own eyes?&#34;
They presumably don't engage in such fairy tales in Germany, which is why they can borrow money at half the rate of the crayon-eaters here in Washington.
-Brett Arends
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(END) Dow Jones Newswires
05-15-26 1636ET

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The April 2032 inflation-protected U.S. TIPS bond is projected to yield 5.1% this year, combining interest payments and principal adjustments. Despite concerns over U.S. government finances, the bond is considered low-risk, with a real yield of 1.63%. Even with inflation predictions, the bond offers guaranteed returns if held until maturity. Investors may also consider index funds focused on TIPS for added security amid market volatility.

This 'safe haven' bond is projected to pay 5.1% this year - with almost no risk