Does a TIPS Trade Settle on the Settle-Date Factor?
TIPS are quoted without inflation. The invoice adds it back with one multiplier, and the date that multiplier comes from is the settlement date.
Short answer
It settles on the settlement date's factor. A TIPS invoice multiplies the quoted real price and the real accrued interest by the index ratio for the settlement date, so the trade date's ratio only matters if the two dates are the same.
The settlement date’s. A TIPS trade is invoiced on the index ratio for the day it settles, the number desks and confirmations call the factor. Treasury Inflation-Protected Securities are quoted in real terms, so the price on your screen and the accrued interest next to it both leave inflation out, and the invoice puts it back by multiplying them by the factor for the day cash and bonds actually change hands. The trade-date factor plays no part. It would only matter on a trade that settled the same day it was made, when there is just one date and one ratio.
What the factor is
Every TIPS has its own daily reference CPI and its own daily index ratio. To get the ratio for a date, take that day’s reference CPI and divide it by the one from the security’s dated date. Treasury rounds both to five decimals.
The reference CPI moves a little each day. So does the ratio.
How the reference CPI is built, with its lag and its daily interpolation through each month, is set out under TIPS index ratio. For the settlement question you only need the ratio itself, and Treasury publishes it for each TIPS, day by day.
How the invoice is put together
The quoted price is a real price per 100 of par. Real accrued interest is also per 100. Neither one includes inflation.
The invoice combines them in one step. Add the quoted price to the real accrued interest, multiply by par divided by 100, then apply the settlement date’s index ratio, and the result is the amount the buyer pays and the seller receives.
| Piece of the invoice | How it is quoted | Where inflation comes in |
|---|---|---|
| Price | Real, per 100 of par | Multiplied by the factor |
| Accrued interest | Real, per 100 of par | Multiplied by the same factor |
| Index ratio | Five decimals, one value per day | Taken for the settlement date |
Which day that is
Treasuries settle on the next business day by market convention. That one-day gap is the same default cycle covered under regular-way settlement.
A Tuesday trade settles Wednesday. It pays on Wednesday’s factor.
A Friday trade settles on the following business day, usually Monday, and if that Monday is a settlement holiday the date rolls again, so the factor on the invoice belongs to whichever day the bonds and cash finally move, which can sit several calendar days after the day you placed the order.
Because the ratio is interpolated day by day, a weekend still moves it. Saturday and Sunday each have their own reference CPI even though nothing settles on them. A Friday buyer settling on Monday pays on Monday’s ratio, which already reflects the days in between, so the amount due can differ from what Friday’s factor suggested when you placed the order.
Both factors on one hypothetical trade
Every number below is hypothetical. Say you buy 100,000 of par of a TIPS quoted at 98-16, which is 98.50 written as a decimal, with real accrued interest of 0.60 per 100. The index ratio is 1.24900 on the trade date and 1.25000 on the settlement date.
You pay 123,875.00. That’s the settle-date invoice.
The 99.10 gap is the move in the factor between the two dates applied to this position, and it grows with size: on a hypothetical 1,000,000 of par at the same quote and the same ratios it would be ten times as large, 991.00, which is the kind of amount that makes a reconciliation fail if someone pulled the wrong day’s ratio.
The seller sees the same number from the other side. Proceeds on a TIPS sale are built the same way, from the quoted price and accrued interest, both multiplied by the factor for the day of settlement, so a seller who checks the trade-date factor expecting to match the confirmation will be off by exactly the same amount.
Where the arithmetic usually slips
Picking the wrong day is the obvious mistake. Applying the factor to the price alone is the one that slips past people.
The accrued interest is quoted in real terms as well, so it needs the same multiplier. Leave it out and the invoice comes up short by the accrued amount times the part of the ratio above 1.
Another slip is reading the latest inflation release and assuming the factor tracks it. The reference CPI behind each day’s ratio is built from lagged monthly figures, so the newest number in the news is usually not the one in your invoice.
What else rides on the factor
Each coupon is the real coupon rate applied to the adjusted principal, which is par scaled up or down by the ratio. As the ratio climbs, each coupon is worth more in dollars.
At maturity you receive the larger of par and the adjusted principal.
Tax is the other place the factor shows up. Held in a taxable account, a TIPS produces taxable income every year from its inflation adjustment to principal, reported as original issue discount. The details depend on your situation, so ask a tax professional how it applies to your return.
A TIPS price and its yield are both stated in real terms, and the link between real and nominal returns is set out in real interest rates explained.
Checking a fill on your own account
Start with the confirmation. It should show the index ratio used, or an adjusted principal you can divide by par to recover it.
- Note the trade date and the settlement date.
- Find the ratio, or the adjusted principal.
- Look up Treasury’s published index ratio for that CUSIP on the settlement date.
- Rebuild the invoice: price plus accrued, times par over 100, times the ratio.
If the confirmation’s ratio matches the trade date instead, ask your broker to explain it.
Also asked
- Is the factor the same for every TIPS on a given day?
- No. The reference CPI for a date is shared, but each bond divides it by the reference CPI on its own dated date. Two TIPS with different dated dates carry different index ratios on the same settlement date.
- Why does my confirmation show more principal than the par I bought?
- That figure is usually the adjusted principal: par times the index ratio for the settlement date. Divide it by par and you get the factor the trade used.
- Can the index ratio be below 1?
- It can, if the reference CPI on a date is lower than it was on the bond's dated date. At maturity, Treasury pays back whichever is larger, adjusted principal or par.