Treasury Inflation-Protected Securities

• Demand looked strong at this auction, with the real yield falling about 7 basis points from the secondary market’s yield earlier in the morning.
• The inflation breakeven rate came in at 1.10%, a reasonable number given our uncertain deflationary future.
• A 5-year TIPS is still a more attractive investment than a 5-year nominal Treasury note, currently yielding 0.33%. But there are alternatives.

The U.S. Treasury just announced that its reopening auction of a 5-year TIPS, CUSIP 912828ZJ2, resulted in a real yield to maturity of -0.766%, the lowest for this term at auction since April 2013.

The “real yield to maturity” indicates how this 4-year, 10-month Treasury Inflation-Protected Security will perform against official U.S. inflation. Investors at Thursday’s auction were willing to accept a return that will trail inflation by 0.766% over nearly five years.

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• The real yield looks likely to drop to about -0.65%, the lowest yield for any auction of this term since April 2013.
• The inflation breakeven rate is running at about 0.98%, up from recent lows but still attractive as an alternative to nominal Treasurys.
• Better alternatives? Clearly, the U.S. Series I Savings Bond is superior to a 5-year TIPS. Another choice would be to ride out this deflationary period in a 1-year bank CD.

Just when it seems we really need inflation protection, investments in inflation protection are looking awful. Or, more accurately, just when it seems like we need safe investments, safe investments are looking awful.

Welcome to June 2020 in our virus-stricken United States.

The U.S. Treasury on Thursday will offer $15 billion in a reopening auction of CUSIP 912828ZJ2, creating a 4-year, 10-month Treasury Inflation Protected Security. Depending on how you look at our nation’s near-term future, this offering is either enticing (for solid reasons) or total garbage (also for solid reasons). I’m leaning 75% toward garbage.

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• Price declines reflected the effects of COVID-19 shutdowns, with gas prices falling, along with prices of auto insurance, air travel, apparel and lodging away from home.
• Price increases hit more necessary items: Food, shelter, medical care and, alcohol.
• How long with this deflationary trend continue? If gasoline prices increase sharply in summer months, inflation could hold nearly flat.

• In its five-month auction history, CUSIP 912828Z37 showed remarkable volatility, with a swing of 115 basis points from March to May.
• Today’s real yield of -0.47% was the lowest at auction for any 9- to 10-year TIPS since March 2013.
• Negative real yields are the new normal and will continue as long as the Federal Reserve continues interventions into the bond market.

• The Treasury will reopen a 10-year TIPS at auction on Thursday, with the real yield to maturity expected to be well below zero.
• This TIPS — CUSIP 912828Z37 — had an amazing reopening auction in March, just as Treasury yields were surging.
• It’s not an attractive investment for small-scale investors, but the inflation breakeven rate of about 1.18% will make it appealing to big-money investors.

The U.S. Treasury will offer $12 billion in a reopened 10-year Treasury Inflation-Protected Security — CUSIP 912828Z37 — at auction Thursday, in an event that will reveal just how depressing the TIPS market has become.

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• The 20-year bond will re-launch Wednesday for the first time since 1986 at a regularly scheduled auction. The nominal yield should be about 1.05%.
• The Treasury will raise $20 billion in this auction, part of a massive borrowing effort this year, to fund COVID19 relief programs.
• The nominal yield of 1.05% is highly unattractive for small-scale investors. Series EE Savings Bonds offer equal safety at the same term with a massive yield advantage.

The U.S. Treasury will re-launch its 20-year bond in a historic auction Wednesday, offering $20 billion of this new issue, CUSIP 912810SR0. The 20-year bond has not been sold to the public regularly since 1986.

My reaction? This is a great idea for the Treasury. It’s also a lousy investment for small-scale investors. And there is a much, much better alternative available, also with a 20-year term, and just as safe.

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• Gasoline prices fell a remarkable 20.6% in April, setting off a deflationary surge across the economy.
• Core inflation fell to 1.4% year over year, breaking a 27-month streak of rates at or above 2.0%.
• Inflation-protected investments, especially TIPS, will suffer in this deflationary period.

In a stunning reflection of the current U.S. economy, the Bureau of Labor Statistics reported today that U.S. inflation fell 0.8% in April, the largest drop since December 2008, at the opening of the Great Recession. Year-over-year U.S. inflation has now plummeted to just 0.3%, down from 2.5% at the beginning of the year.

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• U.S. Series I Savings Bonds purchased from May to October will pay a composite rate of 1.06%, annualized, for six months.
• EE Bonds will continue to double in value if held for 20 years, creating a tax-deferred, compounded rate of return of 3.5%.
• Both of these savings bond investments remain superior to better known alternatives offered by the U.S. Treasury.

The U.S. Treasury just announced it is cutting the fixed rate of U.S. Series I Savings Bonds to 0.0% as of May 1, a move that was widely expected and won’t dampen the appeal of these inflation-protected savings bonds.

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• The new Treasury reality is negative real returns and stunningly low inflation expectations.
• The auction result of a real yield to maturity of -0.320% matched the Treasury’s overnight estimate.
• The inflation breakeven rate of 0.69% makes this TIPS – even with a negative real yield – much more desirable than a five-year nominal Treasury. But there are better alternatives.

Today’s Treasury auction of $17 billion in a new five-year Treasury Inflation-Protected Security – CUSIP 912828ZJ2 – reflected a new reality of ultra-low yields and grim inflation expectations.

Investors got a real yield to maturity of -0.320%, the lowest for any TIPS auction of this term in five years.

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