Treasury Inflation-Protected Securities

• The new schedule adds a second new 5-year TIPS to the 2019 auction lineup. One 30-year TIPS reopening has been removed.
• The new lineup allows the Treasury to offer larger auctions, more frequently, meeting its needs to raise funds to meet higher deficits.
• It’s a good move for small-scale investors, because the 5-year TIPS is currently the most attractive offering.

While preparing a chart of upcoming auctions of Treasury Inflation-Protected Securities a few weeks ago, I noticed something odd: The Treasury had scheduled a 5-year TIPS reopening in June, in the spot normally reserved for a 30-year TIPS reopening.

Was it a typo? Or was the schedule changing? An alert reader also noticed this change and pointed to this wording on an obscure page of TreasuryDirect:

We auction 5-year TIPS in April, June, October, and December; 10-year TIPS in January, March, May, July, September, and November; and 30-year TIPS in February, and August.

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• Last April, a similar auction generated a real yield of 0.631% and a coupon rate of 0.625%, both better results than today’s.
• The inflation breakeven rate came in at 1.86%, a fair number in today’s time of muted inflation.
• A mild market reaction indicates this was a solid auction, and investors can be pleased by snagging a 0.50% coupon rate.

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• Above-inflation yields have declined sharply, but still remain “relatively” attractive compared to those of the last 10 years.
• Five-year bank CDs yielding above 3% are a compelling alternative.
• I Bonds with the current fixed rate of 0.5% are also more attractive, so buy I Bonds to the max before investing in this five-year TIPS.

As of today, with four days to go, CUSIP 9128286N5 looks likely to get a real yield to maturity of 0.52% and a coupon rate of 0.50%. If the auctioned real yield slips below 0.50%, the coupon rate will fall to 0.375%.

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• Real yields have fallen dramatically since the Treasury’s last rate reset on November 1. The current fixed rate of 0.5% is therefore “above market.”
• Today’s real yields justify a fixed rate of about 0.2% to 0.3%.
• I Bond investors should always seek out the highest fixed rate, and that means buying the full 2019 allocation before May 1.

The U.S. Treasury gives no hint about how it determines the fixed rate for I Bonds. It simply announces the new rate every May 1 and November 1. It’s a mystery. But I’ve been tracking these decisions for a long time, and I believe the 0.5% fixed rate has little chance of continuing.

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• Energy prices drove overall inflation up sharply in March, giving a boost to the I Bond’s variable rate calculation.
• I Bonds purchased before May 1 will offer an overall one-year return of 2.4%, but most importantly will carry a permanent fixed rate of 0.5%.
• My advice continues to be: Buy I Bonds up to your full allocation before the fixed rate is reset on May 1.

U.S. inflation surged a bit in March, the Bureau of Labor Statistics reported today, providing the final piece of data needed to set the new inflation-adjusted variable rate for U.S. Series I Savings Bonds.

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Also, I have updated my Tracking Inflation and I Bonds page with the new data.

And here are the new May inflation indexes for all TIPS.

• The current fixed rate of 0.5% is likely to fall on May 1, possibly to as low as 0.2%.
• I Bond investors can lock in that 0.5% fixed rate for up to 30 years by investing before April 30.
• A new inflation-adjusted variable rate is also coming May 1 and may be substantially lower than the current 2.32%.

I failed to follow my own advice this week. I put in an order to buy my full 2019 allotment of U.S. Series I Savings Bonds on March 28. Why? Because the time is right to buy I Bonds.

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• The after-inflation yield was the lowest for any 9- to 10-year TIPS auction since January 2018.
• The inflation breakeven rate came in at 1.94%, a fair number that indicates this TIPS is neither cheap nor expensive versus a nominal Treasury.
• Looking for a better option for inflation protection? Consider U.S. Series I Savings Bonds, purchased through April 30.

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