We examine a possible trade. Consult your adviser about details and decisions. This missive is an opinion and is not investment advice.
A 3% real yield on long-duration U.S. Treasury bonds is a generational rarity. We haven’t seen it in 25 years.
The 30-year Treasury Inflation-Protected Securities (TIPS) program was reintroduced in 2010. Since then, real yields have lingered below 2%. On September 24, 2026, the 30-year TIPS (Treasury Inflation-Protected Security) real yield was about 2.95% as Treasury Secretary Scott Bessent tried as much as a $6 billion buyback execution. Bessent may claim he is “The House” but his trade failed for lack of sufficient offerings.
Because long-dated zero-coupon instruments lack coupon payments to cushion market price volatility, Bessent has triggered sharp intraday price swings. The market forces are bigger than the HOUSE.
Here’s the math.
But first a Kotok interruption: I speculate Bessent is not getting sufficient offerings because market agents have matched long term liabilities with strips and don’t want to lose their positions. Asset-liability management is a stronger market force than opinions by a politician even if he is the Secretary of the Treasury of the United States.
Back to math.
On September 24, during the candle lighted White House state dinner, two things happened.
1. The Shanghai Futures Exchange (SHFE) gold warrants increased to a record high of 116.031 metric tons. This is up from the previous week’s 114.843 tons. I have written about Shanghai several times in the Kotok Report.
2. The nominal 30-year Treasury zero-coupon yield was 5.47%; this is the same as the 5.47% 30-year coupon yield. Compare that with 30-year TIPS. Investors can use the market’s implied inflation breakeven rate, (which sits at exactly 2.95%). So, if you buy the nominal coupon 30-year bond, you are getting paid about 2.5% above the market implied inflation rate.
Kotok opinion: These are linked because the gold price is viewed by globalists as a protection against inflation. Meanwhile, the TIPS yield is the US metric for inflation in the United States.
As you read this technical summary, please ask yourself if the real yield for America is a victim of the $2 trillion annual Trump federal deficit with no end in sight. Is Shanghai gold saying that the USA must pay more than before and the 3% real yield is the new normal? Kotok doesn’t know and no one else does either, but the question seems to be looking for an answer.
That said, the rules are straightforward: if you expect the Non-Seasonally Adjusted Consumer Price Index for All Urban Consumers (Headline CPI-U) to average above 2.95% over the next three decades, you buy 30-year TIPS to outpace inflation. If you expect inflation to drop below that mark, nominal zeros are the mathematically superior choice. And strips are superior still, if you have a long-term liability to match.
But standard coupon-bearing TIPS present a structural duration mismatch against zero-coupon bonds. A 30-year nominal zero pays nothing until maturity; its effective duration is a full 30 years. Its price today is about $2000 for a final maturity in 30 years of $10,000.
A standard 30-year TIPS distributes semi-annual cash interest alongside inflation adjustments, which pulls its effective duration down to roughly 20 years.
To isolate inflation risk from interest rate sensitivity, an investor can actively equalize the duration profile across both asset classes. The cleanest method to align duration is to buy 30-year TIPS Principal STRIPS (stripped TIPS). These are created by physically detaching a TIPS bond’s final principal repayment from its semi-annual interest components. Then you have a pure inflation-protected zero-coupon instrument.
Without coupon inflows to shorten the timeline, a stripped TIPS instantly matches the 30-year duration of a nominal zero. The Bureau of the Fiscal Service updates the security’s principal base daily, scaling it in exact lockstep with monthly headline CPI-U data.
Stripped TIPS can operate as a highly explosive tactical trading vehicle. If economic cooling drives real yields from today’s 2.952% high back to their 1.50% historical mean, the asset’s mathematical convexity triggers an immediate windfall. A 30-year stripped TIPS purchased at today’s deep discount could offer a 50% plus gain in market price, if real yields decline to 1.50% real yield historical average. But there’s a warning. If ongoing federal deficits push real yields up to 4.00%, extension risk drops the price to about $30. inflicting a 25% paper loss.
Note, Chart prepared about a month ago when real yield was 3.02% vs 2.95% today.
But there’s another adjustment. Matching this sensitivity requires a 1.5x dollar-duration position sizing strategy. Because standard 30-year TIPS carry a shorter 20-year duration, you must overweight your allocation to match a nominal zero coupon’s price volatility.
To match the dollar risk of a baseline $100,000 investment in 30-year nominal STRIPS, you must purchase $150,000 of standard 30-year TIPS. This ratio ensures that if yields drop by a full percentage point, both strategies generate nearly an identical dollar gain.
Once portfolios are aligned to an identical 30-year duration, long-term compounding across different inflation regimes creates vastly different returns. Over 30 years, small variances in price indices compound exponentially on a $100,000 allocation. If headline CPI-U averages a steady 3.0% annually, instead of Warsh’s 2% target, the duration-matched TIPS strategy wins. Combining the 3% real yield with a 3% annual inflation adjustment drives the total annualized nominal return of the TIPS portfolio to above 6%.
That means your initial investment will double every 12 years.
The nominal STRIPS portfolio is fixed at the 5.47% rate on day one. It does not adjust to a rising cost of living. This creates a performance margin iin favor of TIPS. More critically, while the nominal STRIPS investor suffers a severe erosion of real-world purchasing power, the TIPS holder keeps their capital protected against inflation.
But what if Fed Chair Warsh delivers what he says he wants to do. The equation completely flips if headline inflation sinks to the Federal Reserve’s strict 2.0% target. Then, the regular principal expansion of the TIPS portfolio slows, dragging its total annualized nominal return down to the lower inflation rate. But the nominal STRIPS investor has locked in a fixed 5.47% yield when the market priced in a higher 2.95% breakeven hurdle.
Note, you need your tax advisor. Both portfolios generate an annual “phantom tax” liability, meaning the IRS requires federal income tax payments on imputed interest or principal appreciation before any physical cash is distributed.
To protect your capital from these annual cash-flow leaks and maximize long-term compounding, both long-dated instruments are structurally optimized when held inside a tax-advantaged wrapper like a Traditional or Roth IRA.
So, if you believe inflation will be 3% you trade one way. If you think Warsh delivers 2%, trade the opposite way. Note how important the oil price is to this long-term inflation outlook. As we recently wrote (September 24), the backwardation in the oil futures curve is saying the current oil price will be 40% lower in 5 years.
Again, seek the advice of your investment professional. And please contemplate this as you ponder why Secretary Bessent cannot get enough offerings to complete his buyback.
For readers who want a closer look at municipal bonds, Cumberland Advisors has prepared a brief PDF, published September 25, 2026, on the recent price decline, higher yields, and the risks that remain. You can read it here.
Final Kotok Note: AI helped with calculations and searching for the closing market price on September 24. Pricing sources: CNBC, Bloomberg, Trading Economics. All errors are mine.
David values thoughtful, reasoned, constructive responses from readers. To contact him, please send an email. The subject line should read “Response to [title of commentary].”
The complete Kotok Report archive can be found at www.kotokreport.com.
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