Treasury Inflation-Protected Securities

• Higher gasoline prices accounted for more than one-third of the increase in headline inflation, the BLS reported.
• But crude oil prices began declining in October, which should be reflected in near-term gasoline prices.
• Both headline and core inflation matched expectations, so there should be little market disruption from Wednesday’s report.

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• I Bonds purchased from November through April will carry a composite rate of 2.83%, based on a fixed rate of 0.50% and inflation rate of 2.32%.
• The fixed rate of 0.50% is the highest in 10 years, and means the return on I Bonds is likely to at least match inflation, even after federal income taxes.
• The Treasury held firm on the 0.1% fixed rate for EE Bonds, but also retained terms that double their value in 20 years, for an effective interest rate of 3.5%.

Today’s announcement is very good news for I Bond investors, even for those who have already purchased their allocation for 2018. (The Treasury limits purchases to $10,000 per person per year.) But that clock restarts on January 1, so all investors will have access to the 0.50% fixed rate through April.

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• The after-inflation yield of 1.235% was higher than where this TIPS was trading in the secondary market. That indicates weak demand.
• The yield was the highest for any 29- to 30-year TIPS auction since February 2014.
• The inflation breakeven rate came in at 2.13%, in line with recent auctions of this term.

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• The I Bond’s inflation-adjusted rate will rise slightly on November 1, so there is no pressure to buy before then.
• But could the I Bond’s fixed rate fall from its current 0.3%? The data suggest zero chance, but the Treasury is unpredictable.
• In fact, the data clearly support an increase in the fixed rate to 0.4% and possibly even 0.5%.

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• With a few days to go to Thursday’s auction, this TIPS is trading on the secondary market with a real yield of 1.19%, a two-year high.
• Investors will get this TIPS at a discount, because the after-inflation yield will be higher than the coupon rate of 1.0%.
• Buyers beware: Any 30-year Treasury will be a very volatile investment, especially in a time of rising interest rates and rising federal deficits.

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