Investing - Theory, News & General • Buying TIPS vs. Treasuries when no unexpected inflation

Considering whether to buy a TIPS or Treasury security when not overly concerned with unexpected inflation, I ran a comparison of the cash flows between a 10-year TIPS and a 10-year Treasury Note (TN). The results surprised me a bit so am trying to see if I errored in the math or conclusions.

This was done for two cases, when dividends were reinvested and when they were not. FYI, Year 11 is just the maturing of the security and this has nothing to do with ladders.

The key metrics (the rates are from Friday’s close) are:

Face amount:$100,000
Tax: 25%
Discount rate: 3%
TIPS10 rate: 2.83%
TN10 rate: 5.17%
Expected inflation: 2.34%

Dividends not reinvested:

Code:

Year01234567891011TotalsNPV/PVTIPS10100,000102,340104,735107,186109,694112,261114,887117,576120,327123,143126,024128,973Cash-100,000 2,8962,9643,0333,1043,1773,2513,3273,4053,4853,566128,97361,18320,495Tax1,3091,3401,3711,4031,4361,4701,5041,5391,5751,6120Net1,5871,6241,6621,7011,7411,7821,8231,8661,9101,954017,65214,973TN10100,000100,000100,000100,000100,000100,000100,000100,000100,000100,000100,000100,000Cash-100,000 5,1705,1705,1705,1705,1705,1705,1705,1705,1705,170100,00051,70016,343Tax1,2931,2931,2931,2931,2931,2931,2931,2931,2931,2930Net3,8783,8783,8783,8783,8783,8783,8783,8783,8783,878038,77533,076

Dividends reinvested:

Code:

Year01234567891011TotalsNPV/PVTIPS10100,000105,170110,607116,326122,340128,665135,317142,313149,670157,408165,546165,546Cash-100,000 2,8302,9763,1303,2923,4623,6413,8294,0274,2364,455165,546101,42549,826Tax2,0002,1032,2122,3272,4472,5732,7062,8462,9933,1480Net8308739189661,0151,0681,1231,1811,2421,306010,5238,867TN10100,000105,170110,607116,326122,340128,665135,317142,313149,670157,408165,546165,546Cash-100,000 5,1705,4375,7186,0146,3256,6526,9967,3587,7388,138165,546131,09274,824Tax1,2931,3591,4301,5041,5811,6631,7491,8391,9342,0340Net3,8784,0784,2894,5114,7444,9895,2475,5185,8036,103049,16041,423

The conclusions from this exercise, when there is no unexpected inflation:
1.With no dividend reinvestment, TIPS outperform TN pre-tax over the entire period, due to compounding of the inflation adjustment.
2.TIPS outperforming TN over the entire period is diminished on a PV (present value) basis.
3.With dividend reinvestment, TIPS & TN perform the same pre-tax over the entire period.
4.TN outperforms TIPS post-tax over the entire period due to taxation of the inflation adjustment.
5.TN annual cash flows outperform TIPS in any normal inflation environment.

What I was looking for was whether it was better to invest in a TIPS or Treasury when you have unexpected inflation otherwise addressed. If you are the type of person who invests their fixed income for a specific maturity date, then TIPS seem like a better answer if you do not reinvest the dividends (this was the bit that surprised me, as I had not considered this was a factor but is obvious upon close inspection). If you prefer to get your cash out annually instead of waiting until maturity, then Treasuries seem like the better choice.

Statistics: Posted by Ferd Burfel — Sun Sep 27, 2026 10:02 am