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Why TIPS Don't Belong In Taxable Accounts

Published 09/13/2012, 12:40 AM
Updated 07/09/2023, 06:31 AM

It might strike some a hyperbole to accuse the government of stealing taxpayers money – up there with the conspiracy theories around JFK’s assassination or the staging of the Apollo 11 moon landing in a warehouse in Hollywood. But it’s just the sorry Math confronting savers, most recently highlighted in a CNBC article yesterday. Conventionally, lowering the cost of borrowing should be stimulative for economic activity, but it’s a zero sum game and savers including many retirees are in effect funding this stimulus through negative real returns on their savings.

The yields on TIPS (Treasury Inflation Protected Securities) show this quite starkly – 5 year TIPS have a negative yield of 1.47%. What’s even worse for taxable investors is that the income they receive (equal to the CPI) is immediately taxable whereas the negative interest rate isn’t recognizable as a loss until maturity. TIPS don’t belong in taxable accounts. And of course, the biggest borrower nowadays is the Federal government, so they’re benefitting from setting their own ultra-low borrowing cost.

I’ve been surprised at how little public outcry there has been from savers reacting to this stealth transfer of part of their wealth to borrowers (who of course benefit from ultra-low rates). I doubt that’s about to change, but at least the issue is gaining some attention.

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