Treasury Inflation-Protected Securities

• The real yield of 0.261% was the lowest for any 29- to 30-year TIPS auction in history, and much lower than the previous record of 0.479%.
• The coupon rate also set a record low of 0.250%, much lower than the previous record of 0.625%.
• Long-term real yields are in a “weird” zone. Beware.

The U.S. Treasury’s auction of a new 30-year Treasury Inflation-Protected Security went off Thursday with a sensational result: A record low real yield of just 0.261%, well below any 29- to to 30-year TIPS auction in history.

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• Investors had to pay a big premium for this TIPS, about $100.86 for $99.97 of value, after the January inflation adjustment.
• The inflation breakeven rate came in at 1.68%, slightly lower than looked likely last week. Still, inflation fears seem to be rising.
• Real yields could continue falling, but an investment at real yields this low is not attractive.

The U.S. Treasury’s auction Thursday of $14 billion in a new 10-year Treasury Inflation-Protected Security generated a real yield to maturity of just 0.036%, the lowest yield on an auction of this term since May 2013.

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• The Treasury will offer a new 10-year TIPS at auction Thursday. Real yields are currently running at about 0.09%.
• TIPS have had a great run over the last year, but wasn’t the time to buy a year ago?
• The current inflation breakeven rate of 1.75% is reasonable, but inflation expectations have been rising, making TIPS more expensive versus nominal Treasurys.

The U.S. Treasury will offer $14 billion in a new 10-year Treasury Inflation-Protected Security at auction Thursday. This is CUSIP 912828Z37, and the coupon rate and real yield to maturity will be determined by the auction.

I’m not likely to be a buyer, even though 10-year issues are the “sweet spot” of TIPS investing, usually offering the optimal above-inflation yield versus length of term. But right now real yields on TIPS – across all maturities – are too low to make them attractive.

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• Gasoline prices, up 7.9% in 2019, and shelter costs, up 3.2%, were major factors in 2019’s moderately high inflation.
• December inflation, however, fell slightly below consensus estimates. You can expect the Fed to continue its “on hold” rate policy.
• Investor interest in inflation protection is rising. Best bet for small investors: U.S. Series I Savings Bonds.

While many financial “experts” have been declaring U.S. inflation dead for years, it surged back to life in 2019 – rising 2.3%, the highest number since 2011. While 2.3% isn’t scary-high, it is on the high end of moderate inflation.

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• The I-Bond’s current fixed rate of 0.20% (essentially, its “real yield”) means it remains the most attractive inflation-protected investment.
• I recommend waiting until April 10 to make an I-Bond investment decision, because we will then know the future variable rate.
• Most likely, the fixed rate of 0.20% will be the highest we see in 2020, but a lot can change in the next 12 months.

After a year of deep declines in yields for Treasury investments, here’s something to remember: U.S. Series I Savings Bonds remain a relevant investment.

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