--- title: "Rising Oil Prices Are Reviving The Case For TIPS" type: "News" locale: "en" url: "https://longbridge.com/en/news/287458957.md" description: "Rising oil prices, influenced by the Iran conflict, have led to increased bond yields and inflation, with the 10-year US Treasury yield rising from 3.9% to 4.6%. Oil prices surged from $67 to over $105 per barrel, causing retail gasoline prices to rise significantly. TIPS (Treasury Inflation-Protected Securities) offer a real yield of 2.1%, adjusting for inflation, making them attractive for investors seeking to protect purchasing power amidst rising inflation, currently estimated at 4.2%. The breakeven inflation rate for 10-year TIPS is 2.5%." datetime: "2026-05-24T11:10:48.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/287458957.md) - [en](https://longbridge.com/en/news/287458957.md) - [zh-HK](https://longbridge.com/zh-HK/news/287458957.md) --- # Rising Oil Prices Are Reviving The Case For TIPS _Inflation is never gone; it's always in remission. It's something that is human-made, and governments can create it._ – **Warren Buffett** (2006) ## The Iran Conflict & Bond Yields Bond yields hit their 2026 lows just as the armed conflict with Iran began at the end of February. Since then, the 10-year US Treasury yield has risen from 3.9% to 4.6%. While some of the increase in yields is likely due to continued expected US economic growth, upward pressure on inflation from higher oil prices stemming from oil supply disruptions associated with the Iran conflict is certainly part of the puzzle. ## Energy Prices Oil prices have risen from around $67 per barrel at the end of February to over $105 per barrel recently. In the price inflation seen most often by US consumers, average retail gasoline prices have risen from $2.98 at the end of February to $4.52 per gallon. ## Inflation Inflation, as measured by the consumer price index (CPI), was 2.4% year-over-year in February and has risen to an estimated 4.2% year-over-year according to the Cleveland Federal Reserve Bank. ## Nominal Versus Real Yields For investors, inflation matters because an investment that grows in dollar terms may not actually grow in terms of what those dollars can buy. If your portfolio returns 4% in a year but the cost of everything you purchase also rises by 4%, your real wealth hasn't changed at all. A fundamental goal of investing is to protect or grow your **purchasing power** over time, which is what you can actually purchase with your wealth. Understanding the distinction between nominal and real yields is essential to evaluating whether an investment truly accomplishes this goal. Think of **nominal yields** as absolute yields. If an investment offers 5%, you will earn 5% on your money in dollar terms. However, if the goods and services you purchase increase in price by 3%, you are only 2% better off in terms of what that money can buy. Nominal yields do not guarantee inflation-adjusted returns. **Real yields** are inflation-adjusted yields. If an investment offers a 5% real yield, your purchasing power, as defined by the relevant inflation measure, will increase by 5%. ## Treasury Inflation-Protected Securities (TIPS) Inflation-protected securities, such as TIPS (Treasury Inflation-Protected Securities), are designed to deliver a real yield, which distinguishes them from conventional bonds. TIPS are built to automatically adjust for inflation, anchoring returns to real purchasing power rather than nominal dollar amounts. ## How TIPS Work TIPS are U.S. Treasury securities whose principal adjusts with inflation as measured by the Consumer Price Index for All Urban Consumers (CPI-U). This is a lagging, realized inflation measure. ## Principal and Coupon Adjustment At issuance, TIPS carry a fixed real coupon rate. Over time, the outstanding principal is adjusted based on changes in CPI-U. The semiannual coupon payment is then calculated by applying the fixed coupon rate to the inflation-adjusted principal. As a result, both the coupon cash flows, which you receive semiannually, and the eventual redemption value grow with realized inflation or decline with deflation. TIPS deliver a _real_ return rather than a nominal one. Currently, the 10-year US TIPS have a real yield of almost 2.1%. Historically, that is a relatively attractive real return. ## Deflation Floor At maturity, the holder receives the greater of the inflation-adjusted principal or the original par value. This embedded protection means that even in a sustained deflationary environment, the investor will not receive less than their original principal at redemption. However, interim mark-to-market values can still reflect a below-par adjusted value due to increases in real interest rates. In practice, the US rarely experiences deflation. ## Breakeven Inflation The spread between the nominal yield on a conventional Treasury and the real yield on a comparable-maturity TIPS is known as the **breakeven inflation rate**. This market-derived figure represents the average annual inflation rate over the life of the bond at which an investor would be indifferent between holding a nominal Treasury bond and a TIPS. - If **realized inflation exceeds** the breakeven rate, TIPS will outperform the comparable nominal Treasury. - If **realized inflation falls short** of the breakeven rate, the nominal Treasury will outperform. The breakeven rate is observable in real time as market conditions evolve, making it a useful gauge of inflation expectations and a tool for evaluating relative value between TIPS and nominal Treasuries. The current 10-year TIPS breakeven inflation rate is 2.5%, lower than the current inflation rate but slightly above long-term market-based inflation expectations. ## Taxation Of TIPS ## Phantom Income The inflation-driven adjustments to the principal are treated as original issue discount (OID) and are taxable as ordinary income in the year they accrue, even though no cash is received until the coupon payment dates or maturity. This can create a “phantom income” problem where investors owe taxes on income they have not yet received in cash. ## Deflation Offsets If CPI-U declines and the adjusted principal decreases, the IRS allows a corresponding reduction in OID income for that year. If the deflation adjustment exceeds the year’s OID income, the excess can be treated as an ordinary loss. The tax treatment is roughly symmetric: inflation accruals generate taxable income, and deflation adjustments offset it. ## State and Local Tax Exemption Like all US Treasury securities, TIPS interest and OID are exempt from state and local income taxes. This can provide some offset to the security's overall tax inefficiencies. ## Tax-Advantaged Accounts Given the phantom income issue, TIPS are often more effectively deployed in tax-advantaged accounts, such as IRAs. These structures help to reduce or eliminate the impact of the annual tax drag on unrealized inflation accruals and cash flow mismatch, allowing the investor to capture more of the benefit of inflation protection. ## Other TIPS Considerations ## Duration and Interest Rate Risk While inflation expectations are one factor driving long-term interest rates, they are not the only one. Changes in real growth expectations and other factors often lumped together as term premia can affect rates independently of inflation. To the extent that interest rates move without a corresponding change in inflation expectations, TIPS holders remain exposed to that duration, or interest rate, risk. Specifically, TIPS carry interest rate sensitivity to changes in _real_ interest rates. ## Credit Risk TIPS are backed by the full faith and credit of the US government. Credit risk is negligible, as the US government owns the printing press for producing dollars. ## Inflation Measure Mismatch CPI-U is a broad measure of consumer prices. It may not perfectly capture the inflation experienced by every investor or match the specific liability an investor is trying to hedge. For example, CPI-U may diverge meaningfully from medical cost inflation, housing cost inflation in specific markets, or higher education tuition inflation. The protection TIPS provide is only as precise as CPI-U's relevance to the investor’s actual spending patterns or targeted liabilities. ## Ways To Invest In TIPS ## Individual TIPS Bonds Individual TIPS bonds are liquid but trade with wider bid-ask spreads, which can lead to higher trading costs than comparable nominal Treasuries. The market is smaller and less actively traded, which can modestly increase transaction costs. ## ETFs and Mutual Funds TIPS exchange-traded funds (ETFs) and mutual funds provide diversified exposure across the TIPS maturities and simplify operational complexity. The fund handles OID accounting and consolidates the various cash flows and taxable events into standardized 1099 reporting. ETFs do offer a modest structural advantage through their in-kind creation and redemption mechanism, which generally allows the fund to avoid realizing capital gains when rebalancing or meeting redemptions. This is an ETF-versus-mutual-fund advantage, not a TIPS-specific tax benefit. ## Summary Historically, stocks have provided the best long-term real return of any asset class. Exposure to companies with pricing power is the most effective way to retain and grow family wealth over time. Furthermore, the tax efficiency of a low-turnover stock investment strategy makes it highly effective at compounding after-tax, after-inflation wealth over long periods. With all that said, TIPS, especially if held in tax-advantaged accounts like IRAs, can be a valuable addition to portfolio construction and risk management. Stagflation, persistent inflation paired with stagnant growth, is the environment where TIPS are likely most effective. The key is in how the two halves of the environment pull real and nominal interest rates in opposite directions. Weak growth pushes real interest rates down. As the economy stalls, the market's required compensation for pure real return shrinks. High and rising inflation, meanwhile, pushes nominal interest rates up; the nominal yields an investor demands should compensate for expected erosion of purchasing power, so as inflation expectations climb, nominal yields likely climb with them. As inflation compounds, the TIPS principal and coupons adjust upward mechanically. And as real yields fall, the real yields provided by existing TIPS become more valuable. Stagflation is an environment in which stocks historically perform poorly because slow growth weighs on earnings, making it difficult to keep up with or surpass inflation. So, TIPS should complement stock holdings to reduce risk. While stagflation is not our forecast for the economy, a continued energy shock could raise the odds. In any case, TIPS appear to have a fairly attractive real yield entry point currently and should benefit from the higher energy-cost pass-through in future inflation readings. ### Related Stocks - [OXY.US](https://longbridge.com/en/quote/OXY.US.md) - [TIP.US](https://longbridge.com/en/quote/TIP.US.md) - [UCO.US](https://longbridge.com/en/quote/UCO.US.md) - [GOVT.US](https://longbridge.com/en/quote/GOVT.US.md) - [VDE.US](https://longbridge.com/en/quote/VDE.US.md) - [IEZ.US](https://longbridge.com/en/quote/IEZ.US.md) - [XLE.US](https://longbridge.com/en/quote/XLE.US.md) - [IXC.US](https://longbridge.com/en/quote/IXC.US.md) - [SCHP.US](https://longbridge.com/en/quote/SCHP.US.md) - [XES.US](https://longbridge.com/en/quote/XES.US.md) - [IEO.US](https://longbridge.com/en/quote/IEO.US.md) - [VTIP.US](https://longbridge.com/en/quote/VTIP.US.md) - [OIH.US](https://longbridge.com/en/quote/OIH.US.md) - [SHV.US](https://longbridge.com/en/quote/SHV.US.md) - [IEF.US](https://longbridge.com/en/quote/IEF.US.md) - [BIL.US](https://longbridge.com/en/quote/BIL.US.md) - [CRAK.US](https://longbridge.com/en/quote/CRAK.US.md) - [BNO.US](https://longbridge.com/en/quote/BNO.US.md) - [USO.US](https://longbridge.com/en/quote/USO.US.md) - [TLT.US](https://longbridge.com/en/quote/TLT.US.md) - [XOP.US](https://longbridge.com/en/quote/XOP.US.md) ## Related News & Research - [TREASURIES-10-year yields hit 2-month high on oil surge, Fed fears](https://longbridge.com/en/news/293484340.md) - [Oil prices hover at six-week high as Middle East shipping risks escalate](https://longbridge.com/en/news/293555449.md) - [TREASURIES-Ten-year yields jump to 18-month high on oil spike, Fed worries](https://longbridge.com/en/news/293634764.md) - [Trump Is Playing Chicken With the Country That Fuels Half of America — During a Global Energy Crisis](https://longbridge.com/en/news/293912348.md) - [Oil prices rebound by more than $2 a barrel on prospect of tightening US crude supplies](https://longbridge.com/en/news/294128765.md)