Yes or no on the May 23 10-year TIPS reissue?

I am going to say yes on this auction, and that is significant: It will be the first TIPS I will have bought at auction since June 2011, a 30-year TIPS with a yield of 1.774%. I won’t be going ‘all in’ but I will be reinvesting money from a TIPS that matured earlier this year.

I am pretty thankful that a series of economic events have driven the likely yield on this TIPS up to somewhere around -0.28%. That is 35 basis points higher than the yield of this TIPS, CUSIP 912828UH1, when it was first auctioned on Jan. 24, just four months ago.

Yes, I know that -0.28%, plus inflation, is not an attractive yield. But look at the history of recent 9- to 10-year TIPS auctions, and you can see that Thursday’s reissue will be the most attractive since March 2012:

recent TIPS auctions

Back in March 2012, by the way, the auction set an all-time low for a 9- to 10-year TIPS. But things were about to get a whole lot worse, as the Federal Reserve ramped up its bond buying and stoked fears of inflation.

Jump forward to May 2013, and inflation is running an extremely mild 1.1% over the last 12 months. Inflation is currently out of the picture as a major concern. Just look at what Fed Chairman Ben Bernanke said today:

“I would point out that even though we have a dual mandate, that inflation if anything is a little bit too low. Inflation has been very low; the dollar has been strong. We have not in any way failed on that responsibility.”

So inflation fears are dwindling, but at the same time interest rates are rising. Here are numbers for yields on the 10-year nominal Treasury:

  • May 1, 2013 = 1.66%
  • May 10, 2013 = 1.90%
  • May 20, 2013 = 1.97%
  • May 22, 2013 = 2.03%

And then, this is the important point: TIPS are getting cheaper. We have seen a very gradual decline in the 10-year TIPS breakeven rate (nominal Treasury yield minus TIPS yield = breakeven rate). Here is the trend in breakeven rates, drawn from Treasury data:

  • March 16, 2012 = 2.43%
  • Jan. 2, 2013 = 2.53%
  • March 21, 2013 = 2.54%
  • May 1, 2013 = 2.30%
  • May 10, 2013 = 2.35%
  • May 20, 2013 = 2.28%
  • May 22, 2013 = 2.27%

It’s not a dramatic change, but TIPS have been getting steadily cheaper versus nominal U.S. Treasurys.

Thursday’s auction offers a chance to reload with a buy-and-hold 9-year, 8-month TIPS at a yield that is a definite improvement over more than a year of auctions.

The future (for TIPS buyers) may be even brighter. Who knows?

I think it’s time to jump cautiously back into the pool.

 

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3 Responses to Yes or no on the May 23 10-year TIPS reissue?

  1. Pingback: Friday Reading: How Many Bank Accounts?

  2. Ed says:

    Dave, TIPS have cheapened further in the 8 days since your post. Any thoughts why, any thoughts future …?

  3. Pingback: Recapping 2013: The year in TIPS | Treasury Inflation-Protected Securities

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