TIPS Breakeven Inflation Spread Calculator
What This TIPS Breakeven Inflation Calculator Does
This calculator compares a nominal U.S. Treasury bond with a Treasury Inflation-Protected Security (TIPS) of the same maturity. It focuses on the breakeven inflation rate and the after-tax real returns for each choice across different inflation scenarios.
The main questions it helps you answer are:
- At what inflation rate would I be indifferent between a nominal Treasury and a TIPS?
- How do taxes change the relative attractiveness of TIPS vs nominal Treasuries?
- Under higher- or lower-than-expected inflation, which security is likely to deliver the better real, after-tax return?
You can adjust yields, maturity, expected inflation, and tax rates to match your own situation or current market conditions.
Key Formulas
1. Simple (Pre-Tax) Breakeven Inflation
The simplest definition of breakeven inflation is just the difference between the nominal yield and the TIPS real yield:
Breakeven inflation (approx) = Nominal Treasury yield − TIPS real yield
In plain language, this is the inflation rate at which you would be roughly indifferent between holding the nominal Treasury or the TIPS before considering any tax effects or compounding details.
2. More Detailed Representation
The underlying idea can also be expressed in MathML to highlight how inflation moves nominal and real returns:
Where:
- is the nominal Treasury yield.
- is the real TIPS yield.
- is the breakeven inflation rate.
In the calculator, this formula is expanded to an after-tax comparison by applying your marginal tax rates to the interest and inflation adjustments and then converting nominal after-tax returns into real terms.
How to Use the Calculator
- Set the maturity: Choose the number of years until the bonds mature (for example, 5, 10, or 30 years).
- Enter the nominal Treasury yield: Use the current yield on a Treasury with the same maturity as your TIPS (for example, a 10-year Treasury note).
- Enter the TIPS real yield: Use the quoted real yield on the comparable TIPS.
- Provide your expected inflation: This is your baseline inflation forecast over the life of the bonds.
- Enter your tax rates: Input your marginal federal and state tax rates, plus how TIPS accruals are taxed in your situation.
- Set the inflation scenario range: Choose how far above and below your baseline inflation you want to test (for example, ±1%).
- Run the analysis: The calculator computes the breakeven spread and shows after-tax real returns for both securities across downside, baseline, and upside inflation scenarios.
You can copy the summary or download a CSV file for more advanced spreadsheet analysis or investment committee reports.
Interpreting the Scenario Table
After you analyze the breakeven, the tool presents a table with three inflation scenarios:
- Downside: Baseline inflation minus your selected scenario range.
- Baseline: Your own central inflation estimate.
- Upside: Baseline inflation plus your scenario range.
Each row of the table typically includes:
- Scenario: Downside, Baseline, or Upside.
- Inflation: The assumed average annual inflation rate in that scenario.
- Nominal Treasury real return: The estimated real, after-tax return on the nominal Treasury in that scenario.
- TIPS real return: The estimated real, after-tax return on TIPS.
- TIPS advantage: The difference between the TIPS and nominal real returns (positive numbers favor TIPS; negative numbers favor nominal Treasuries).
If the TIPS advantage is positive in most realistic scenarios, TIPS are likely a better hedge for your expectations. If it is consistently negative, the nominal Treasury is favored at current pricing and tax assumptions.
Worked Example: 10-Year Treasury vs 10-Year TIPS
Assume the following:
- Maturity: 10 years
- Nominal Treasury yield: 4.0% per year
- TIPS real yield: 1.5% per year
- Expected inflation: 2.7% per year
- Federal tax rate on interest and TIPS accruals: 32%
- State tax rate: 5%
The simple breakeven inflation rate is:
4.0% − 1.5% = 2.5%
This means that, before taxes and detailed compounding, if average inflation over the next 10 years is exactly 2.5%, you would be roughly indifferent between the nominal Treasury and the TIPS.
Using the calculator with the tax assumptions above, you might see results similar to:
- Nominal Treasury: After-tax nominal return of about 2.38%, which converts to a real return of approximately −0.32% once 2.7% inflation is considered.
- TIPS: After-tax real return of roughly +0.85% in the same inflation scenario, after accounting for both the real coupon and the taxable inflation adjustments to principal.
In this example, TIPS clearly outperform the nominal Treasury on a real, after-tax basis at 2.7% realized inflation. If your true inflation outcome were instead closer to 2.0%, the relative advantage of TIPS would shrink, and at sufficiently low inflation the nominal Treasury would become more attractive.
When TIPS May Outperform vs When Nominals May Win
| Condition | TIPS Likely Favored | Nominal Treasuries Likely Favored |
|---|---|---|
| Expected inflation vs breakeven | Expected inflation is above the breakeven spread. | Expected inflation is below the breakeven spread. |
| Inflation uncertainty | High uncertainty or fear of upside inflation surprises. | Relatively confident in low and stable inflation. |
| Tax considerations | Tax treatment of inflation adjustments is manageable and you value explicit inflation protection. | You want to avoid phantom income from inflation accruals or you hold in a tax-advantaged account where nominal bonds already work well. |
| Portfolio role | Seeking a direct hedge against loss of purchasing power. | Seeking simple nominal cash flows and benchmark-like exposure. |
Always interpret the calculator’s outputs in the context of your broader portfolio, risk tolerance, and time horizon.
Assumptions and Limitations
This tool uses simplifying assumptions to keep the calculations transparent and fast. Important assumptions include:
- Constant yields: It assumes nominal and real yields stay the same over the holding period, rather than fluctuating as markets move.
- Smooth inflation path: Inflation is modeled as accruing evenly over time, not in volatile spikes or sudden deflation.
- Annual taxation: Taxes on interest and TIPS inflation adjustments are approximated as if they are recognized and paid annually.
- No transaction costs: Bid–ask spreads, brokerage commissions, and market impact are ignored.
- No reinvestment risk: Coupons are effectively treated as if they earn the same yield without reinvestment uncertainty.
- No liquidity or risk premia: Differences in liquidity or risk premia between TIPS and nominal Treasuries are not modeled separately.
- Tax rules simplified: Actual tax treatment may differ by jurisdiction, account type, and individual circumstances. The model is educational, not a tax engine.
Because of these limitations, the results should be viewed as estimates, not precise forecasts. They are best used for directional comparisons (for example, which side is favored under a range of inflation scenarios) rather than exact performance predictions.
Important Disclaimer
The outputs of this calculator are for informational and educational purposes only. They are not personalized investment, tax, or financial advice, and they do not constitute a recommendation to buy or sell any security. Past performance and model projections do not guarantee future results. Before making investment or tax decisions, consider consulting a qualified advisor who can review your specific situation, including the tax rules that apply in your jurisdiction and account types.