Next up: 10-year TIPS reopens at auction Sept. 18

Hate to admit this auction announcement actually slipped past me (I’ve been out of town lately), but maybe it’s for the best because conditions in the TIPS market have been changing dramatically in the last two weeks. So, yeah, oops, the Treasury announced last Thursday that it will reopen CUSIP 912828WU0 on Sept. 18, creating a 9-year, 10-month TIPS with a coupon rate of 0.125%.

This will be a fascinating auction because CUSIP 912828WU0 was first auctioned July 24, 2014, with yield to maturity of 0.249% (plus inflation). Because that yield fell just below the 0.250% mark, the Treasury set the coupon rate one notch (1/8 percent) lower, to 0.125%, the lowest possible on any Treasury Inflation-Protected Security.

Now, add in the rising yields of the last two weeks, and you get a TIPS selling at a pretty nice discount, a rarity in TIPS auctions of the last three years. Here’s what we can say right now about CUSIP 912828WU0, after the close of market Monday:

  • Because this TIPS trades on the secondary market, you can track its real-time value at Bloomberg’s Current Yields page. Not always totally accurate midday, but at this moment it is showing a yield of 0.46% and a price of about $96.81 per $100 of value, a discount of more than 3%.
  • The Wall Street Journal’s Closing Prices page is showing a yield of 0.444% and a price right around $96.81 per $100 of value.
  • The Treasury’s Real Yields page is estimating a yield to maturity of 0.47% for a full-term 10-year TIPS. This is 20 basis points higher than the yield estimate for Sept. 2, just two weeks ago.

So in the two months since its original auction, CUSIP 912828WU0 has gone from ugly ducking to ‘sorta-homely-but-more-interesting.’ Keep in mind that six months ago, a similar 9-year, 10-month TIPS auctioned with a yield to maturity of 0.659%. That was in March 2014, before Treasury yields started another decline.

The very recent trend has been rising Treasury yields, and that could cause some uneasiness at Thursday’s auction. Could that mean an upside yield surprise? We’ll find out at 1 p.m. Thursday.

Also, watch for Wednesday’s report on the Consumer Price Index. The expectation is for continued mild inflation. A surprise in either direction could upset the TIPS market.

Inflation breakeven point. With a 10-year TIPS yielding 0.47% and the 10-year traditional Treasury yielding 2.60%, this sets up an inflation breakeven rate of 2.13%. If inflation averages more than 2.13% over the next 10 years, CUSIP 912828WU0 will outperform a traditional Treasury. This is on the lower end of the ‘moderate’ scale, meaning this TIPS is fairly cheap, at least versus a traditional Treasury.

For the record, here is a chart of all 9- to 10-year TIPS auctions since January 2008:

10- year tips auctions

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PenFed’s new 1-year CD shows the screwed-up state of interest rates

I am a customer of the Pentagon Federal Credit Union, also known as PenFed, and I jumped happily aboard when it offered an above-market 3% 5-year CD in December 2013 and January 2014. But since then its CD rates have dipped to U.S. market levels, which are very low.

Then I got this offer in an e-mail from PenFed yesterday:

PenFed 1-year CDPenFed’s offer requires just a $1,000 investment for a 1-year CD, paying 1.06%. Early withdrawal forfeits six months of interest payments. That’s good; but not wildly good.  The national average for a 1-year CD is 0.24%, but BankRate.com lists several institutions offering 1.10% today.

But here’s what’s intriguing about PenFed’s ‘promotional rate.’ That 1.06% offer is placed on every PenFed CD from 1 to 4 years, and bumps up to only 1.21% for 5- and 7-year. Here is rate information from its Website:

PenFed ratesMy conclusion is that PenFed expects to sell only one thing: 1-year CDs. There would be no reason for customers to accept that 1.05% rate on a 2-year, 3-year, 4-year CD, or just slightly higher on a 5-year or 7-year CD.

Consider this: A 5-year traditional Treasury is paying 1.79% today. That is 58 basis points higher than PenFed’s 5-year and 7-year CDs. It makes no sense; except to conclude that PenFed is pushing customers toward a 1-year CD.

Treasury yields are on the move

PenFed is demonstrating the ultimately flat yield curve, but in recent days yields across the Treasury market have been rising. This is a trend worth watching.

For example, the 5-year TIPS yield dropped to -0.28% on Aug. 15, but has since risen to 0.10%, based on the Treasury’s Real Yield Charts. This is the first time since April that the 5-year yield has moved into positive territory. Here’s a one-year chart, minus the last few days because the St. Louis Fed’s data has some lag time:

5-year TIPS yieldIn reaction to rising yields, the price of the TIP ETF has been declining — very conveniently (!) since I posted Why TIPS aren’t a good buy right now: A story in charts on Sept. 4. Here’s the 5-day chart since Sept. 4:

5-day TIPSLong way to go to $110, which is still my target/prediction for when TIPS become more appealing. We probably won’t be seeing that anytime soon, but we can hope. Because I want to be a net buyer of TIPS, I am cheering for higher yields.

Posted in Investing in TIPS | Tagged , | 2 Comments

Why TIPS aren’t a good buy right now: A story in charts

I am a choosy buyer of Treasury Inflation-Protected Securities, so choosy in fact that I’ve only pulled the trigger three times since July 2011. In that time, yields on TIPS have plummeted, while at the same time inflation has been very mild. TIPS haven’t been that attractive. These were my purchases:

  • May 2013: Bought a 9-year, 8-month TIPS with a yield of -0.225%. The current yield on that TIPS is 0.223%.
  • July 2013:  Bought a 10-year TIPS with a yield of 0.384%. The current yield on that TIPS is 0.192%.
  • August 2013: Bought a 4-year, 8-month TIPS with a yield of -0.127%. The current yield on that TIPS is -0.417%.

At the time, I thought these were attractive yields that fit my TIPS ladder and investing needs. For the 37 other TIPS auctions since July 2011, I haven’t found an attractive combination. So I have been sitting on the sidelines.

Am I a market timer? No. I buy-and-hold TIPS to maturity, so I am not a trader. I am just looking for the best opportunities for my limited investment cash.

And right now – in September 2014 – I am not finding attractive opportunities in TIPS. Yields have dropped sharply this year, meaning TIPS are much more expensive than they were in 2013. And they are more expensive against other bond investments, as this chart shows:

year to date

The TIP ETF has greatly outperformed Vanguard’s Total Bond Market ETF (BND) and the Intermediate Treasury ETF (IEI) in 2014. That indicates TIPS are getting more expensive versus the overall bond market. NOTE: The TIP ETF is more volatile because it has a duration of 7.78, versus 4.59 for IEI and 5.60 for BND.

This out-performance looks very much like the pattern in 2012, when TIPS yields were plummeting:

2012 TIPSAnd this out-performance led to a crushing fall in 2013, when yields in the TIPS market rose by more than 100 basis points, sending the TIP ETF plummeting, even against other bond investments:

2013 TIPSA lot of new TIPS investors who poured money into mutual funds and ETFs after July 2011 didn’t realize they were getting a possibly volatile investment. TIPS seem so conservative. After May 2013, they got the message loud and clear. And when the fall came, I was buying.

Just to drive this point home, here is a chart showing 2104 year-to-date yields for the 10-year TIPS, which I consider the benchmark. It has been a steady decline:

10-year yieldOn the other hand, it’s a positive for TIPS that the 10-year inflation breakeven point has been behaving very nicely, staying in a lowish pattern against the traditional 10-year Treasury.  This chart would indicate that TIPS aren’t a bad investment right now, at least versus traditional Treasurys, and also that TIPS were oversold in 2013:

Inflation breakevenA lower number is a good thing, indicating TIPS are less expensive versus traditional  Treasurys. In general, a number above 2.5% means TIPS are very expensive, and a number below 2.0% means they are very cheap. This chart shows a good trend for TIPS buyers.

Conclusion. I have a very rough guide: If the yield on a 10-year TIPS begins approaching 1%, I will be likely to buy. When it stays below 0.5%, I am very unlikely to buy, unless a certain investment meets my needs, such as filling a hole in my investment ladder.

Also, keep an eye on the price of the TIP ETF, which is currently $114.54. When it begins to approach $110, sellers will be panicking and buyers will need to be ready.

Market timing? No. Just a common sense approach to buy-and-hold investing.

Posted in Investing in TIPS | 10 Comments

5-year TIPS auctions with yield of – 0.281%

The Treasury Department sold $16 billion in 5-year Treasury inflation-protected securities Thursday at a yield of -0.281%.

That’s from Marketwatch … I am on the road.

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Checking in on Thursday’s TIPS auction, plus words from the Fed

I will be traveling Thursday and so I won’t be able to post any before- or after-thoughts on Thursday’s reopening of CUSIP 912828C99, creating a 4-Year 8-Month Treasury Inflation-Protected Security with a coupon rate of 0.125%.

So let’s take a look at where we stand at 6:05 p.m. Wednesday:

  • This TIPS was trading today with a yield to maturity of -0.29%, according to Bloomberg’s Current Yields chart. This is up about 12 basis point from where it was last week.
  • The Wall Street Journal’s Closing Prices chart shows that this TIPS maturing April 2019 closed with a yield of -0.308% and a price of about $102 for $100 of value (because of the the coupon rate of 0.125%).
  • The Treasury’s Real Yield Curve chart estimates a full 5-year TIPS would yield -0.18%. This estimate isn’t directly comparable with the two quotes above, since a full-term TIPS would yield slightly more than a TIPS with 4-month-shorter term.

So, conditions have improved since I wrote about this auction last week. Last Thursday, the market was signaling a yield of about -0.41% and now -0.29% looks more likely.

With the 5-year nominal Treasury trading today at 1.65%, you’re looking at an inflation breakeven rate of 1.94% for this TIPS. I’d probably take that bet if I were thinking about buying a 5-year Treasury, but maybe not against a 5-year bank CD paying 2.30%, which pushes the breakeven point up to 2.59%.

Honestly, I’m not in the market to buy any of these at the moment. I mean, could interest rates be rising next year? …

Did the Fed give a signal today?

The Wall Street Journal’s Website lead story right now has this headline: ‘Fed Minutes: Rate-Hike Debate Heating Up.’ An excerpt:

Federal Reserve officials debated at their July meeting whether to move sooner than expected to start raising interest rates in light of an improving job market and rising inflation, but decided they needed more evidence before concluding that was the right approach.

The minutes of the meeting, released Wednesday, provide fresh evidence of an intensifying debate inside the central bank about when to respond to a surprisingly swift descent in the unemployment rate and rising consumer prices.

You can read the Fed’s full minutes here. There’s a giant section with the heading: Monetary Policy Normalization, which I can assure you has not appeared in any Fed minutes over the last couple of years. It includes this paragraph:

Meeting participants continued their discussion of issues associated with the eventual normalization of the stance and conduct of monetary policy, consistent with the Committee’s intention to provide additional information to the public later this year, well before most participants anticipate the first steps in reducing policy accommodation to become appropriate.

In other words, the Fed is saying: ‘More to come. Just wait patiently.’ But in fact, the Federal Reserve just signaled that there is more to come, and a reason to wait patiently.

For the Fed, that is a pretty big step.

Posted in Investing in TIPS | 1 Comment

U.S. inflation rose a moderate 0.1% in July

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1% in July on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, this ‘headline’ inflation rate increased 2.0%.

The 0.1% number matched the consensus estimate and broke a four-month string of 0.2%-or-higher monthly increases. Today’s inflation report was a mixed bag – food prices increased a sharp 0.4% in July, but where offset by a 0.3% decline in energy costs, including gasoline. New vehicle prices were up 0.3%, but used vehicle prices declined by the same amount.

Holders of Treasury Inflation-Protected Securities and I Bonds are also interested in the non-seasonally adjusted CPI-U, which is used to adjust the principal on TIPS and set the future inflation-adjusted interest rate on I Bonds. In July, the non-seasonally adjusted inflation index declined slightly to 238.250, down 0.04% from the June index.

I have updated my Tracking Inflation and I Bonds page to reflect the new July number. With two months of inflation numbers remaining, the I Bond inflation-adjusted interest rate would reset to an annualized 1.64% on Nov. 1. But remember, two months remain.

Here is the one-year trend in CPI-U, which still shows a bump in the inflation in recent months:

2014 inflation

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Up next: 5-year TIPS will reopen at auction Aug. 21, 2014

The US Treasury just formally announced it will reopen CUSIP 912828C99 at auction next Thursday, creating a 4-Year 8-Month Treasury Inflation-Protected Security with a coupon rate of 0.125%.

This TIPS was originally auctioned on April 17, with a yield to maturity of -0.213%, plus inflation. Buyers at that auction paid about $101.87 for $100 of value because of the spread between the yield and the coupon rate.

What can we expect? Since April, yields on TIPS have been sinking, dropping to a low for the year of -0.44% in late May. Recent strength in the overall bond market has again pushed TIPS yields to near their yearly lows.

  • Bloomberg’s Current Yields page shows a yield of -0.44% for CUSIP 912828C99 on today’s secondary market.
  • The Wall Street Journal’s Closing Prices page shows a closing yield of -0.418% for this TIPS on Wednesday.
  • The Treasury’s Real Yields page – which estimates the yield on a full-term 5-year TIPS – shows -0.29%, a fairly wide variance from the other two real-world measurements.

Let’s set aside the Treasury’s number and for now let’s estimate a yield of about -0.420% for next week’s auction. That would mean buyers will pay about $102.50 for $100 of value, plus chip in more than $1 for accrued inflation. That’s pretty pricey for a 0.125% coupon rate.

This chart tracks the longer-term trend for yields on 5-year TIPS, showing the wild swing of more than 500 basis points from the depth of the recession to Fed-induced ultra-low rates of 2012:

5-year yieldsIt’s impossible to figure what’s ‘normal’ from that chart, but certainly the peak and the nadir can be ruled abnormal. The pre-recession yields above 1% generate nostalgia, but that’s about it. Let’s work on getting above zero.

I personally won’t be participating in next week’s auction, unless yields climb dramatically in the next seven days.

Alternative? I repeat again that buying US Savings I Bonds up to the limit is a much better investment than a 5-year TIPS paying -0.41%. I Bonds currently pay 0.1% above inflation. That is 51 basis points better than a TIPS, and I Bonds are more flexible investments and the interest is tax deferred.

Here is a chart of 4- to 5-year TIPS auctions since 2007. Check it out and tell me if you can figure out what would pass for a ‘normal’ yield in 2014, minus Fed manipulation and simmering world turmoil:

TIPS auctions

Posted in Investing in TIPS | 3 Comments