Question

Suppose that the current yield of 110 year maturity Treasury note is 2% and the current yield on 10 year maturity TIP S is 1% if the expected us inflation rate of next year is 2% which security do you want to buy between tips and the Treasury note

Answer 1

I will be buying treasury inflation protected securities because treasury inflation protected securities will be providing me with rate of return after adjustment of inflation from the overall rate of return so they will be inflation-protected and their real return will be 1%.

whereas, if we are looking at the treasury note rate of return, it is 2% but the inflation rate is also 2% so the real rate of return is Nil, and hence I will be preferring to invest into treasury inflation protected securities (TIPS) which will provide me with an adjustment of inflation into returns and there will be a net return of 1% that is higher than treasury note.

I will prefer TIPS for investment.