Treasury Inflation-Protected Securities

• After a strong run over the last 12 months, these short-term Treasury ETFs are now yielding very close to zero.
• There’s little upside potential and little yield benefit over Treasury money market funds, which lock in your share price at $1.
• Are these ETFs a risky investment? No, they are fine. But the reward-versus-risk equation doesn’t look appealing.

Over the last year, as short-term interest rates dropped dramatically, a lot of investors poured money into short-term Treasury ETFs as a way to capture a yield advantage over a money market account, while retaining safety.

Unfortunately, those days are over.

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• The real yield of -0.966% was slightly higher than where this TIPS was trading on the secondary market just minutes before the auction’s close.
• The inflation break-even rate settled in at 1.65%, which looks like a reasonable number. Inflation hawks should see this as a positive for this investment.
• This TIPS auction could be considered “normal” by the strange standards of normality in 2020.

The Treasury’s $12 billion reopening of CUSIP 912828ZZ6, creating a 9-year, 10-month Treasury Inflation-Protected Security, auctioned Thursday with a real yield to maturity of -0.966%, the lowest yield for any auction of this term.

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• The 10-year real yield has dipped deeply negative, to nearly 1% below inflation.
• But that reflects the bond market’s very low nominal yields. This TIPS’ inflation breakeven rate of about 1.67% is still appealing.
• For the first $10,000 you invest in inflation protection in 2020, the Series I Savings Bond is the better investment. Then consider TIPS.

The U.S. Treasury is reopening CUSIP 912828ZZ6 in an auction Thursday, offering $12 billion in this 9-year, 10 month Treasury Inflation-Protected Security. Even though terms of this TIPS are hardly dazzling, I’m expecting investor interest to be strong.

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• Both all-items inflation (at 0.4%) and core inflation (at 0.4%) were higher than consensus estimates, continuing a recent trend.
• The August inflation report is signaling a 1.2% increase in the Social Security COLA for 2021, but one more month of data remains.
• A recent surge in inflation has been good news for holders of TIPS and I Bonds, reversing the deflationary months of March and April.

U.S. inflation increased 0.4% in August on a seasonally adjusted basis, again surpassing consensus estimates and proving once more that inflation is a factor to be considered in investment strategies.

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• EE Bonds will earn a remarkable 3.5% annually if held for 20 years, tax deferred and free of state income taxes.
• I Bonds will match U.S. inflation with a flexible maturity date and solid protection against deflation.
• Both of these savings bonds are likely to outperform other safe investments like U.S. Treasurys and bank CDs.

These are dire times for investors looking for both safety and a return that can surpass or at least approach U.S. inflation. If you are retired, it’s a double whammy: You want to set aside cash for future needs, but you will earn only pennies on many thousands of dollars.

Is there a way — in September 2020 — to combine reasonable yield with total safety? The answer is, yes, there is.

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• The real yield of -0.272% fell about 53 basis points below the yield of the originating auction on February 20.
• Investors had to pay a huge premium to collect the coupon rate of 0.25%, about $116.32 for about $100.26 of inflation-adjusted principal.
• The market reaction to the auction looked negative, with the yield climbing about 6 basis points higher than where this TIPS was trading minutes before the auction close.

The U.S. Treasury’s auction Thursday of $7 billion in a reopened 30-year Treasury inflation Protected Security – CUSIP 912810SM1 – generated a real yield to maturity of -0.272%, the first time in history a TIPS auction of this term resulted in a yield negative to inflation.

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