Treasury Inflation-Protected Securities

• The 0.3% increase in the Consumer Price Index fell slightly below the consensus estimate, so no shock to the markets.
• Core inflation rose at an annual rate of 2.1%, showing that inflation exists outside of rising gasoline prices.
• Good news for holders of TIPS: June principal balances will rise by 0.53%, following increases of 0.56% in June and 0.43% in May.

The April inflation report again pointed to energy costs as the primary driver of U.S. inflation. The gasoline index rose 5.7% for the month, and is now up 3.1% over the last 12 months, reversing a long trend of declining prices.

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Also, I’ve updated my Tracking Inflation and I Bonds page with the new numbers.

And I updated the TIPS Vs. Nominals page with results for the 5-year TIPS that matured in April. That TIPS under-performed a nominal Treasury by 0.34% a year.

And here are the new June Inflation Indexes for all TIPS.

• 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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