Treasury Inflation-Protected Securities

• 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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• The Treasury will reopen CUSIP 912810SM1 in a Thursday auction, creating a 29-year, 6-month TIPS.
• The real yield looks likely to be around -0.26%, making this the first TIPS of this term to get a negative real yield.
• Investors will probably pay a huge premium, about 16% above par value. This TIPS isn’t attractive for a buy-and-hold-to-maturity investor.
• But for a TIPS trader, it might have speculative appeal.

• In a surprise, July inflation came in much higher than the consensus for both all-items and core inflation. Gas prices again were a big factor.
• The recent surge in inflation now has the Social Security COLA on track for a 1.0% increase in 2021. But two volatile months of data remain.
• I Bond investors now look likely to get a positive inflation-adjusted variable rate at the November 1 reset.

U.S. inflation in July blew by consensus forecasts, reflecting strong price increases in many categories across the economy, even though food prices declined in the month.

The Consumer Price Index for All Urban Consumers increased 0.6% in July on a seasonally adjusted basis, the same increase as in June, the U.S. Bureau of Labor Statistics reported today. That was double the expected increase of 0.3%.

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• The overall TIPS market has had a huge run-up of almost 16% since the bond market turmoil of mid-March.
• The TIP ETF hit a record high of $126.51 last week, but its one-year performance has been in line with other big bond funds.
• This ETF is not diversified, with only 42 holdings of a single type of U.S. Treasury. It is more volatile than core bond funds.

The iShares TIPS Bond ETF (TIP), which holds the full range of Treasury Inflation-Protected Securities, has had a huge run-up in the last five months, rising almost 16% since it closed at $108.81 on March 18, a day of intense market turmoil. On Thursday, August 6, it closed at a record high of $126.51.

Many readers have been asking me: After this year’s big run-up, is it too late now to begin investing in TIPS?

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• There have been 104 auctions of this 9- to 10-year term since 1997 and today’s result was a record low yield, by a large margin.
• The inflation breakeven rate came in at 1.52%, a reasonable number but higher than recent trends. Inflation expectations are slowly rising.
• Reaction to the auction looked mixed, with TIPS yields rising slightly after the auction’s close at 1 p.m. EDT.

The U.S. Treasury just completed its auction of $14 billion in a new 10-year Treasury Inflation-Protected Security, with a historic result: A real yield to maturity of -0.93%, the lowest in the 23-year history of TIPS auctions of this term.

This is CUSIP 912828ZZ6, and it got a coupon rate of 0.125%, the lowest the Treasury will allow for a TIPS. That means investors at today’s auction had to pay a huge premium for this TIPS: an adjusted price of about $111.03 for about $100.01 of value, after accrued inflation and interest are added in.

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• The real yield for CUSIP 912828ZZ6 could end up around -0.82%, the lowest in the 23-year history of TIPS auctions of this term.
• Fears of future inflation – spurred by massive monetary and fiscal stimulus programs – should attract investors.
• The inflation breakeven rate will be around 1.46%, a reasonable number. But if the inflation hawks are right that 1.46% number will look very attractive.

Here’s the question: Would you prefer a 10-year TIPS yielding 0.82% less than inflation or a 10-year Treasury note with a nominal yield of 0.64%? And how will these investments perform under a scenario of possible rising inflation?

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