Treasury Inflation-Protected Securities

• 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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• This was the lowest real yield for a 4- to 5-year TIPS auction since April 2017, when a new TIPS got a real yield of -0.049%.
• The inflation breakeven rate was 1.69%, a reasonable number that was higher than the originating auction’s 1.50%. Inflation expectations are rising.
• As the 5-year TIPS real yield dips perilously close to negative, investors seeking safety should look for better alternatives: I Bonds or insured bank CDs.

The U.S. Treasury announced Thursday that its $15 billion reopening auction of a 5-year TIPS, CUSIP 912828YL8, generated a real yield to maturity of 0.020%, the lowest for this auction term since April 2017.

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• Over the last year, real yields on shorter-term TIPS have dropped more than 100 basis points.
• In contrast, the real yield on a U.S. Series I Savings Bond has dropped just 30 basis points, making it the preferable investment.
• Coming Thursday: The U.S. Treasury will reopen at five-year TIPS at auction. I advise you to avoid it.

The U.S. Treasury will be offering $15 billion in a reopened five-year Treasury Inflation-Protected Investment on Thursday. Over the last several years, this December TIPS auction has been one of the most attractive each year. Not this year, though.

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• Headline inflation, which was higher than expected in November, has now topped 2.0% for the first time since November 2018.
• Core inflation matched expectations but remained moderately high at 2.3% year-over-year.
• Non-seasonally adjusted inflation declined 0.05%, meaning principal balances for all TIPS will decline slightly in January.

As is often the case, a main factor in November’s all-items increase was a 1.1% increase in the price of gasoline, which is still down slightly (1.2%) year over year. But other prices also showed marked increases.

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