New 5-Year TIPS Gets Real Yield Of -1.32%, Lower Than Expected

Summary

  • The result, which dipped below recent market indicators, was the second-lowest real yield for any TIPS auction of this term.
  • Investors had to pay a sizable premium for this TIPS, about 7.5% above par value, to collect a coupon rate of 0.125% (plus future inflation accruals).
  • The inflation breakeven rate climbed to 1.69%. TIPS real yields have been declining at the same time nominal yields are rising.

The Treasury’s offering of $17 billion in a new five-year Treasury Inflation-Protected Security – CUSIP 91282CAQ4 – auctioned Thursday with a real yield to maturity of -1.32%, lower than expected by about 10 basis points.

That real yield (meaning the yield after inflation is calculated in) is the second lowest in the history of TIPS auctions of this term. The lowest ever was -1.496%, set by a reopening auction on Dec. 20, 2012.

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This New 5-Year TIPS Might Look Ugly, But It Has Appeal

Summary

  • The U.S. Treasury will offer a new 5-year TIPS at auction Thursday.
  • The real yield looks likely to come in around -1.21%, which is pretty awful but isn’t a record low.
  • The only way to judge this TIPS is to compare it with other very safe investments of similar term. How does it measure up?

The U.S. Treasury on Thursday will offer $17 billion at auction in a new 5-year Treasury Inflation-Protected Security, CUSIP 91282CAQ4. The real yield to maturity and coupon rate will be set by the auction, but we already know, the terms are going to look fairly awful.

But in the current environment of ultra-low interest rates for safe investments, this TIPS should be considered “above average.” Why? Because it provides a hedge against unexpected future inflation.

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Unique Opportunity: I Bonds As An 11-Month Investment

Summary

  • We now know the I Bond’s next inflation-adjusted variable rate, which is rising to 1.68% from the current 1.06%.
  • The permanent fixed rate, currently 0.0%, will be reset on November 1, but is highly likely to remain at 0.0%.
  • The I Bond’s current terms allow it to be used as an 11-month investment that will outperform other safe short-term investments.

Everyone knows I am a big fan of U.S. Series I Savings Bonds, an investment offering returns that will track inflation closely with total safety, tax-deferred interest and solid protection against deflation.

Right now, in our interest-rate-suppressed environment of October 2020, I Bonds have become an attractive short-term (meaning 11-month) investment, while retaining the option to hold them much longer, up to 30 years.

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Inflation Report Sets Social Security COLA At 1.3%; I Bond’s Variable Rate Rises To 1.68%

Summary

  • Social Security payments will increase 1.3% in January, adding about $20 a month for the average recipient. However, a hike in Medicare premiums could wipe out part of that increase.
  • The inflation-adjusted variable rate for U.S. Series I Savings Bonds will be reset to 1.68% for purchases after November 1, up from the current 1.06%.
  • U.S. inflation increased 0.2% in September, matching expectations. Gasoline prices held almost steady for the month.

The September inflation report, released Tuesday morning, is by far the most important report of the year, because it sets both the cost-of-living adjustment for Social Security and also the future inflation-adjusted rate on U.S. Series I Savings Bonds.

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Short-Term Treasury ETFs No Longer Make Investment Sense

Summary

  • After a strong run over the last 12 months, these short-term Treasury ETFs are now yielding very close to zero.
  • There’s little upside potential and little yield benefit over Treasury money market funds, which lock in your share price at $1.
  • Are these ETFs a risky investment? No, they are fine. But the reward-versus-risk equation doesn’t look appealing.

Over the last year, as short-term interest rates dropped dramatically, a lot of investors poured money into short-term Treasury ETFs as a way to capture a yield advantage over a money market account, while retaining safety.

Unfortunately, those days are over.

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10-Year TIPS Reopening Gets A Real Yield Of -0.966%, Lowest In History

Summary

  • 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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tips auction history

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10-Year TIPS: Keep An Eye On The Inflation Breakeven Rate

Summary

  • 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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10-year TIPS history

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August Inflation: What It Means For Social Security, TIPS And I Bonds

Summary

  • 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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Seeking Yield And Safety? The Best Choice Is U.S. Savings Bonds

Summary

  • 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.

Read my full analysis on SeekingAlpha.com

 

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30-Year TIPS Reopening Gets First Negative Real Yield In History

Summary

  • 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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Recent 30-year TIPS auctions

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