danielc wrote: ↑Wed May 12, 2021 10:39 am
#Cruncher wrote: ↑Wed May 12, 2021 6:48 am
... For instance the real yield of the most recently issued TIPS, the 5-year maturing April 2026, was -1.918%
[as of Tuesday's secondary market close]. ...
So it sounds to me like the only reason why the real yield is negative in this example is because the secondary market has adjusted the price of the TIPS so it comes out similar to the negative real yield of other comparable bonds in the market.
Market conditions obtain in a TIPS auction just as much as in the secondary market. For instance, the winning yield bid at the April 22nd auction
of the 1/8% 5-year TIPS maturing 4/15/2026
. This was in line with the TIPS yield curve existing at that time in the secondary market. To produce this large negative yield, the issue was priced at 109.108% of par (before applying the inflation index).
danielc, continuing in same post, wrote:Am I right to say that if I had managed to pay $1,000 for a TIPS with a $1,000 principal then the coupon would equal the real yield? If I had gotten the TIPS at issue, I would have paid $1,000 for a $1,000 principal?
The answer is "yes" to the first sentence, but "no" to the second. If
the price of a bond is close to par (e.g., $1,000 for $1,000 of principal), then the yield will be close to the coupon. For example, look at the 4/19/2018 auction
of the 5/8% 5-year TIPS maturing 4/15/2023
. The winning yield was +0.631%, close to the 0.625% coupon, resulting in a close-to-par price of 99.971%. But the re-
auction of the same TIPS eight months later on 12/20/2018
had a winning yield of +1.129%, requiring a discounted price of 97.895%. 
However, that was 2018 when TIPS yields were higher and this is 2021 with negative yields on all but the longest maturity TIPS. Since Treasury notes and bonds have a minimum 1/8% coupon, there is no way you can buy at par when the yield is less than 0.125%. The only way for a bond with a positive coupon to have a negative yield is for the price to be above par.
danielc, continuing in same post, wrote:If the answer is "no", does that mean that right now I-Bonds are a much better deal than TIPS ... because with an I-Bond you always pay exactly $1,000 for a $1,000 principal? (I'm also assuming that the fact that TIPS adjust CPI more often is not relevant; but that might be a bad assumption).
At current TIPS yields an I Bond with a 0% fixed rate is a much better buy than any TIPS -- even very long term ones if they are to be held in a taxable account. As you say, you will always pay $1,000 for each $1,000 of principal. The timing of the CPI adjustment should average out over time. The two big disadvantages of I Bonds are that you can only buy $10,000 of them per person per year,  and you can't hold them in an IRA. 
- Both the yield and coupon are determined at the first auction of a Treasury note or bond. But at re-auctions only the yield is determined. So at such auctions, even if the coupon is higher than 0.125%, if the yield has gone down from what it was as the first auction, the price will be above par. For example at the 10/26/2009 re-auction of the 1-1/4% 5-year TIPS maturing 4/15/2014 the +0.769% yield was well below the +1.278% at the first auction. The price was therefore above par at 102.104%.
- This is for electronic I Bonds purchased at TreasuryDirect. You can also get up to $5,000 of paper I Bonds as part of a federal income tax refund.
- I Bonds do offer tax deferral, but this is not as good as the tax treatment one gets with either a traditional or Roth IRA.