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A brief addendum to Ken's thorough comment, concerning TIPS.

In the event of deflation for a 6-month period used for making the TIPS inflation adjustment, you will still receive the coupon payment (the coupon on the latest 10-year auction last week was 2%, I believe). The deflation adjustment will be subtracted from the TIPS' principal (face-value). However, the principal can never go below the original face-value. So, what happens is a deflation adjustment is subtracted from previous inflation adjustments to the principal.

Now, here's a fun question. What happens if the first inflation adjustment on a TIPS is negative? Does this just disappear, since there are no absolute negatives. Or is the negative adjustment retained and subtracted from the first positive adjustment?

Another detail worth checking is the dates for CPI-U used for TIPS adjustments. With I-bonds the previous 6 months are one month behind. For a November 1 announcement of yields and adjustments, the 6-months are April through September, since October data is not yet available. For May 1 announcement, the 6-months are October through March.

I would expect, but don't know for sure, that newly auctioned TIPS use 6 month cycles from the latest available 6-month period before issue, which for the early January auction would mean June through November, with December through May as the next adjustment period, and so on. I'm guessing for re-auctioned TIPS, such as last October's 9 year 9 month offering, the inflation adjustment has been added to the principal, with the coupon being what was set at the original auction date. (In other words, re-auctioned TIPS and Treasuries are really buying bonds on the open market, except you can avoid the commission using Treasury Direct of a brokerage that allows free auction purchases.)

Think I'll go play on the Treasury site and see if I can find anything (after I get another cuppa).
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