I don't really get the appeal of nominal bonds over TIPS right now.
Nominal 30yr is \~5.4%, TIPS 3.17%. So the market is basically betting inflation stays under 2.23% for 30 years. That's when nominal wins.
When does that actually happen though? Fed targets 2% as a floor not a ceiling. If inflation drops too low they start printing. So the scenario where nominal wins is the exact scenario the Fed won't let happen. And even if it does, cheap money means the economy is getting juiced so your index funds are probably making it up anyway.
Meanwhile we just spent like 30 years slowly cutting rates to stimulate growth until we literally hit zero. That game feels over? With the debt we're carrying inflation just feels like the path of least resistance. It's how you erode debt without really fixing the problem.
The asymmetry bothers me. If inflation runs hot for a decade nominal bonds just... quietly lose purchasing power with no recovery. Stocks mean revert. Bonds don't. TIPS cut off that tail. Paying 2.23% to eliminate that scenario seems worth it.
One thing that nags at me though. TIPS pay out based on CPI. The government measures CPI. The government pays out on CPI. That's a weird conflict of interest that nobody talks about. Every point they shave off CPI saves them a fortune in TIPS and social security. Am I wrong to be a little paranoid about that?
BTW ... the 4% rule for retirement....
3.17% real return could support 5.20% for 30 year retirement, 4.43% for 40 year, and 4.00% for 50 year.
Kinda interesting to think about.