Treasury Inflation-Protected Securities

• Real yields for this term have dipped about 8 basis points since August 1. Not a great trend heading into an auction week.
• But current after-inflation yields above 0.75% are attractive, and would be the highest yield at auction for this term in nearly 9 years.
• The inflation breakeven rate has dipped below 2.0%, a positive trend for TIPS investors.

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• Real yields are out of balance with historical norms. A 5-year TIPS is yielding only 13 basis points less than a 30-year TIPS.
• Are we heading toward a recession? Would TIPS mutual funds benefit? Possibly, if the Federal Reserves steps in. Or, would a deflation scare set in?
• The U.S. Treasury’s sharply increasing need to raise debt should force longer-term yields higher, sending TIPS funds lower.

One indicator I have watched for a long time is a price of $110 on the TIP ETF, which has marked a “buy signal” over the last seven years. Is that still valid?

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• Today’s result broke a string of 42 consecutive TIPS auctions of the 9- to 10-year term with a coupon rate below 0.75%.
• The actual real yield to maturity was 0.762%, slightly lower than expected, indicating good demand.
• But the inflation breakeven rate dipped to 2.08%, below very recent trends and indicating less-than-strong demand.

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• CUSIP 912828Y38 is a new 10-year TIPS that currently projects to have a real yield of 0.72% and a coupon rate of 0.625%.
• But a lot can change before the July 19 auction. Can the real yield rise above 0.75% and generate a coupon rate of 0.75%?
• No TIPS auction has had a coupon rate of 0.75% since May 2011.

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