TIPS and breakeven inflation: how inflation-protected bonds work

Treasury Inflation-Protected Securities (TIPS) are US government bonds whose principal rises with inflation. An ordinary Treasury note promises fixed dollar payments; a TIPS promises a fixed real rate of interest on a principal that is adjusted using the Consumer Price Index. If prices rise 3% over a year, the principal rises about 3% too, and every later interest payment is calculated on the larger amount.

Because the US Treasury issues both kinds of bond at the same maturities, comparing their yields reveals something no survey can: the inflation rate at which the two would pay the same. That number, the breakeven inflation rate, is the market’s most-watched gauge of inflation expectations. On October 28, 2026, the 10-year Treasury note yielded 5.05%, the 10-year TIPS yielded 2.67% above inflation, and the difference, 2.38%, was the 10-year breakeven.

This page explains how TIPS work, how to calculate and read the breakeven rate, what two decades of data show about breakevens versus the inflation that actually followed, and the traps in treating a breakeven as a forecast.

How TIPS work

TreasuryDirect, the Treasury’s retail site, sets out the terms:

• Maturities: 5, 10 or 30 years.
• Interest: a fixed rate, set at auction and never less than 0.125%, paid every six months. The rate is applied to the adjusted principal, so the dollar amount of each payment changes.
• Principal: adjusted using a version of the CPI from the Bureau of Labor Statistics. It goes up with inflation and down with deflation. The adjustment is tracked through a daily index ratio: adjusted principal = original principal × index ratio.
• At maturity: you receive the adjusted principal or the original principal, whichever is greater.
• Minimum: $100, in $100 increments.
• Tax: interest is subject to federal income tax each year, and increases or decreases in principal during the year may also affect federal taxes. TIPS are exempt from state and local income taxes. For how interest income is taxed in general, see How dividends and interest are taxed: qualified, ordinary, muni.

A worked example

The numbers below are illustrative, chosen to make the arithmetic clear.

So the investor’s real return, the return after inflation, is locked in at roughly the yield paid at purchase if held to maturity. What remains uncertain is the nominal dollar amount.

Breakeven inflation

A 10-year Treasury note and a 10-year TIPS bought on the same day are two bets on the same government’s credit. The note pays a fixed nominal yield; the TIPS pays a fixed real yield plus whatever inflation turns out to be. The inflation rate at which both deliver the same return is the breakeven.

The published series (FRED T10YIE) uses the simple difference. Reading it is direct:

• If inflation over the next ten years averages more than 2.38%, the TIPS will have paid more than the nominal note.
• If it averages less, the nominal note will have paid more.

At 4% average inflation, the TIPS returns roughly 2.67% + 4% = 6.7% a year in nominal terms, against 5.05% for the note. At 1%, it returns about 3.7%. Taxes, trading costs and the timing of payments are ignored here.

Breakevens also separate two forces that move ordinary yields. Compare two days with the same 2.38% breakeven:

Inflation expectations were the same; the whole 3.86-point rise in the nominal yield came from the real yield. Real yields are the subject of Real interest rates: nominal rates minus inflation, explained; the nominal 10-year is covered in The 10-year Treasury yield: why it matters and what drives it.

Breakevens against realized inflation

The chart shows the main thing to know about breakevens: they are much calmer than inflation itself. CPI inflation swung from about −2% in 2009 to 9% in 2022. The 10-year breakeven, averaged by month, stayed between 0.25% (December 2008) and 2.88% (April 2022). Markets expected the 2022 surge to fade over a ten-year horizon rather than persist.

The bigger moves in breakevens came in crises. In late 2008 the daily breakeven fell to 0.04% (November 20, 2008), when the 10-year nominal yield was 3.10% and the real yield 3.06%. In March 2020 it dropped to 0.50%. Both were rushes for cash, and TIPS are less liquid than ordinary Treasuries, so their prices can fall further in such moments; that pushes the breakeven down by more than any change in inflation expectations.

How good were breakevens as forecasts? The table compares the monthly-average 10-year breakeven with the CPI inflation that actually followed over the next ten years:

Realized inflation is the annualized change in the seasonally adjusted CPI-U over ten years. The breakeven was close in some periods and off by more than a point in others: far too low in the 2008 panic, and badly short of the 2021–2022 surge for anyone who bought in 2016.

Why a breakeven is not a pure forecast

Economists generally read a breakeven as expected inflation plus or minus two premiums:

• Inflation risk premium. Holders of nominal bonds bear the risk that inflation comes in high. If they demand compensation for that risk, nominal yields, and so breakevens, sit above expected inflation.
• Liquidity premium. TIPS trade less than ordinary Treasuries. Investors may demand a higher real yield for that, which pushes the breakeven below expected inflation, and sharply so in a crisis when liquidity is prized.

The two premiums pull in opposite directions and change over time, so a breakeven of 2.38% does not mean the market "expects" exactly 2.38%. It is still the most timely market-based read on inflation expectations available, updated every trading day.

TIPS in a portfolio: what the data show

TIPS protect against inflation, not against rising real yields. When real yields jump, TIPS prices fall like any other bond (see Bond prices and yields: why prices fall when yields rise). The 10-year real yield rose from −1.19% in August 2021 to 2.67% in October 2026. On Finabase’s monthly closes, the iShares TIPS Bond ETF (TIP) fell 17.6% in price in 2022 (from $129.20 to $106.44), a year in which the CPI rose 6.4% from December to December. That figure excludes the fund’s distributions, so it understates the total return. It still shows that inflation protection did not prevent losses when real yields rose quickly.

Pitfalls and limitations

• Held to maturity vs traded. The real-return lock holds only if you keep the bond to maturity. Sold early, a TIPS is worth whatever the market pays.
• Tax drag. Principal increases can affect your federal taxes in the year they occur, before you receive the money. In taxable accounts this can reduce the effective real return.
• Index choice. TIPS follow a CPI measure, which may not match your own inflation; see The CPI report: how BLS builds it and how to read it.
• Deflation floor applies once. The guarantee of at least the original principal is at maturity. Interim payments are on the deflated principal, and a bond bought on the market after years of inflation adjustment has its floor far below its current principal.
• Breakevens are not forecasts. See the premiums above and the record in the table.

TIPS and their neighbours

How Finabase does it

Finabase does not carry TIPS real yields or breakeven rates, and it has no bond-level data. The chart on this page is ours, built from Federal Reserve Board and BLS series downloaded through FRED on October 30, 2026.

What the app does show: the Treasury page lists nominal yields from 1 month to 30 years, and the 10-year Treasury yield page charts the nominal half of the breakeven calculation. The iShares TIPS Bond ETF page shows a traded fund of TIPS with its chart and price history, which reflect moves in real yields. Fed and inflation news is in the Fed topic of Discover.

Frequently asked questions

What is breakeven inflation?

It is the inflation rate at which a TIPS and an ordinary Treasury of the same maturity would deliver the same return, approximately the nominal yield minus the TIPS real yield. On October 28, 2026, the 10-year breakeven was 2.38%.

Can TIPS lose money?

Yes, if sold before maturity after real yields rise: TIP, a TIPS fund, fell 17.6% in price in 2022. Held to maturity, a TIPS returns at least its original principal plus interest.

How often do TIPS pay interest?

Every six months, at a fixed rate applied to the inflation-adjusted principal, so each payment can differ.

Is the breakeven rate the market’s inflation forecast?

Only roughly. It also reflects an inflation risk premium and a TIPS liquidity premium, and over 2003–2016 start dates it missed realized 10-year inflation by as much as 1.9 points.

Summary

TIPS are Treasury bonds whose principal is adjusted with the CPI, paying a fixed real rate every six months and returning at least the original principal at maturity. Subtracting the TIPS real yield from an ordinary Treasury yield gives the breakeven inflation rate, 2.38% for 10 years on October 28, 2026, the market’s daily read on expected inflation. Breakevens are far steadier than realized inflation, peaked at just 3.02% during the 2022 surge, and have missed the inflation that followed by up to about 2 points. TIPS protect purchasing power if held to maturity, but their prices still fall when real yields rise, as 2022 showed.