Treasury Inflation-Protected Securities

• Headline inflation numbers matched the consensus forecast, but core inflation ran higher than expected. Gasoline prices were down, moderating overall inflation.
• With one month of data remaining, the Social Security COLA looks likely to increase 1.6% to 1.8% for January payments.
• The I Bond’s new variable rate, to be reset November 1, looks likely to be higher than the current rate of 1.4%.

There was an upside surprise in core inflation — which removes food and energy — with core inflation rising 0.3% in August and 2.4% over the last 12 months. The consensus estimate was for 0.2% for the month and 2.3% year-over-year.

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• The lowly EE Savings Bond now offers substantial yield advantages over similarly safe investments of the same term around the world.
• EE Bonds make sense only for investors who can hold them 20 years, creating an effective yield of 3.53%, compounded.
• They can be used as part of a 20-year plan toward a college education or retirement. Avoid them if you can’t be sure of holding them 20 years.

This doesn’t happen often, but in September 2019, a U.S. Savings Bond has become one of the very best bond investments in the world.

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• Today’s reopening auction generated a real yield of 0.501%, a whopping 59 basis points lower than the originating auction on February 21, 2019.
• Investors had to pay a huge premium for the 1.0% coupon rate, about $115.68 for about $101.79 of value, after accrued inflation is added in.
• Nevertheless, this auction appears to have been met with strong demand from big-money investors.

The real yield was down a bit from where this TIPS was trading on the secondary market at noon, an hour before the auction close. At that time, the real yield was 0.52%. The lower yield at auction indicates this issue had solid demand from investors.

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• The real yield looks likely to come in around 0.46%, down 63 basis points from the originating auction in February.
• Buyers will be paying a steep premium for the coupon rate of 1.0%, about 15% above par value.
• The inflation breakeven rate is currently running at a very low 1.57%, which should make this auction attractive for big-money investors.

Thursday’s reopening auction of CUSIP 912810SG4 – creating a 29-year, 6-months TIPS – is a particularly gruesome offering. The Treasury is selling $7 billion of this reopened TIPS, but no one outside of a central bank or pension fund should touch it.

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• The TIP ETF has had a total return of 8.33% so far in 2019, slightly outperforming the overall bond market.
• Shorter-term TIPS funds have also performed well, but the gain has been less dramatic.
• A relatively low 10-year inflation breakeven rate indicates that TIPS remain a solid choice versus nominal Treasurys. But TIPS funds are riskier today than they were a year ago.

Back on November 20, 2018 — yes, just nine months ago — I wrote an analysis of inflation-protected ETFs and asked, “Is It Time To Buy TIPS ETFs, Mutual Funds?” My conclusion was: Yes, the time is right, especially for shorter-term TIPS funds.

But I didn’t expect what would happen in the next nine months …

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