TIPS on the secondary market: Things to consider

Yes, real yield is important, but there are other factors to consider before making a TIPS purchase. Like: How much is this going to cost?

By David Enna, Tipswatch.com

As real yields continue to slide lower, a lot of investors are feeling a sense of urgency to build a ladder of Treasury Inflation-Protected Securities: Let’s get this done! And that means crawling through the secondary market looking for TIPS to fill year-by-year rungs of an investment ladder.

Of course, the trend of declining yields could reverse, and we could see attractive opportunities later this year. Or … we could see a repeat of 2019, when the 10-year real yield fell from 0.96% on Jan. 2 to 0.15% on Dec. 31. My thinking: This is a reasonable time to work on a TIPS ladder, if that is your goal. Real yields remain attractive, at least by the standards of the last dozen years.

I am getting a lot of questions about TIPS on the secondary market. Is real yield to maturity the only important factor to consider? Why do TIPS with similar maturity dates have different real yields? Is it bad to invest in a TIPS with a high inflation accrual? What about the coupon rate and its effect on price?

In this article I am going to run through five pairs of TIPS with the same or similar maturity dates, but in some cases vastly different up-front investment costs and slightly different real yields. Why does that happen and what is important to consider?

First, some definitions

Par value is the base amount of the TIPS you are purchasing. However, the price you actually pay is going to vary from par value. When you buy a TIPS on the secondary market, you will place a dollar amount in the order box. That is the par value you are purchasing. It is also the amount that is guaranteed to be returned at maturity, even if severe deflation sets in.

For more on the language of TIPS, see my TIPS In-Depth page.

The coupon rate is set by the original TIPS auction. It is the amount of annual interest your TIPS will earn on its inflation-adjusted principal. It is the key factor determining the cost of the TIPS on the secondary market. If the coupon rate is below market real yields for that maturity date, the price will be at a discount. If it is higher, the price of the TIPS will be at a premium.

The real yield to maturity is the amount you will earn above official U.S. inflation as long as you hold the TIPS. It is set through a combination of the coupon rate and the price you paid for the TIPS.

After you buy a TIPS, you are going to earn inflation accruals + coupon rate. That’s it. The price you originally paid — at a discount or a premium — determines your real yield to maturity. While the real yield changes minute-by-minute on the secondary market, once you make a purchase you have locked in your real yield to maturity for that TIPS.

You may see “yield to worst” quoted by the brokerage. For a TIPS, that is the real yield to maturity.

The inflation index is the current amount of accrued inflation already earned by the TIPS you are purchasing. This is stated as a number higher or lower than 1.0. If you are buying a new TIPS at auction, the inflation index is likely to be close to 1.0, or even slightly below. But a TIPS on the secondary market usually will have an inflation index above 1.0, even as high as 1.8.

The Wall Street Journal’s daily listing of TIPS values calls the inflation index “accrued principal” and shows it as a number like 1579. Your brokerage would show that as 1.57905. Vanguard calls it “factor.” Fidelity calls it “inflation factor.” What it means is that this particular TIPS has accumulated 57.9% of accrued inflation above the par value.

Adjusted principal is the amount of principal you are actually purchasing. It’s a simple calculation.

Par value x inflation factor = Adjusted principal.

For example: $10,000 par x 1.57905 = $15,790.50 adjusted principal.

Cost factor is the price you are paying for $100 of accrued principal in this TIPS. At the brokerage you will see “bid” and “ask” prices. You will probably be paying the ask price. It will look something like 97.19 for a TIPS selling at a discount or 100.81 for a TIPS selling at a premium. As I noted earlier, this cost factor is based on the coupon rate of the TIPS versus current market real yields for that maturity.

Investment cost is another simple calculation:

Adjusted principal x cost factor = Investment cost

For example: $15,790.50 x 1.0081 = $15,918.40

Note that in this calculation the cost factor is divided by 100 (100.81 / 100 = 1.0081) to reach a dollar-for-dollar multiplier.

And one more thing: Accrued interest will be added on to the investment cost at the settlement. It reflects the amount of unpaid coupon interest up to the date of the settlement. This is generally a small number, and it gets returned to the investor at the next coupon payment.

Here is an example of pricing for the Jan. 19 auction of a new 10-year TIPS, showing the interaction of these price factors:

TIPS vs TIPS: Examples

Because the Treasury used to issue 20-year TIPS (until it stopped in 2009) there are several examples of TIPS maturing on the same day in the future, but with different coupon rates, different prices, different adjusted principal and different real yields. These offer a chance to examine why real yields could vary slightly for these TIPS maturing on the same day. Is one a better investment than the other? That’s up to you to decide.

Example one: 2025

One thing to notice right away is that these two TIPS have real yields that look highly attractive, around 1.95% above inflation. But keep in mind that yields for very short-term TIPS tend to skew high. One has a coupon rate of 2.375%, so it is selling at a slight premium ($100.81), while the other has a coupon rate of 0.250%, so it is has a much lower price ($96.79).

Also notice the inflation accruals. CUSIP 912810FR4 has an inflation index of 1.57905, while CUSIP 912828H45 has an index of 1.25666. So with one you are buying $15,790 of adjusted principal and with the other, $12,566.50.

Opinion: Investors are demanding a slightly higher real yield for CUSIP 912810FR4 because of its higher inflation accrual. Remember, only the par value of $10,000 — not the $15,918.40 investment cost — is guaranteed to be returned at maturity. My opinion: I’d prefer investing in CUSIP 912828H45 and getting the additional principal at a discounted price.

Example two: 2026

This is similar to example one. CUSIP 912810FS2 has a higher coupon rate but also 49.9% extra accrued principal, versus 25.2% for CUSIP 912828N71. Investors are demanding a slightly higher yield for CUSIP 912810FS2 because of the additional principal, which will purchased at a premium price.

Opinion: Again, I would prefer investing in CUSIP 912828N71 to get the additional principal at a discounted price. Why buy additional, unprotected principal at a premium price?

Example three: 2027

Same pattern: Investors are demanding a slightly higher real yield for CUSIP 912810PS1 because of its higher inflation accrual and premium price. Investors in CUSIP 912828V49 are getting additional principal at a discounted price.

I will note that getting a coupon rate of 2.375% versus 0.375% means CUSIP 912810PS1 gets some additional protection against deflation, since the full coupon interest rate will be paid out, even if the semi-annual payments decline with declining inflation accruals. That’s one reason the real yields remain very close.

Opinion: I’d still go with CUSIP 912828V49’s lower investment cost and lower cost on the inflation accrual.

Example four: 2029

No surprise here: CUSIP 912810PZ5, with its premium price and much higher inflation accrual, gets a higher real yield than its January 2029 partner. Investors want to be compensated for the additional risk — although slight — of the higher above-par principal.

Opinion: I’d actually be a fan of buying lots of additional principal, if it was coming at a discounted price. But in this case, only CUSIP 9128285W6 fits that requirement.

Example five: 2030

Because the Treasury stopped issuing 20-year TIPS in 2009, there is only one TIPS maturing in January 2030, CUSIP 912828Z37. I am comparing it with CUSIP 912828ZZ6, a TIPS that matures six months later in July 2030. I like this comparison because these TIPS are very much alike, both with coupon rates of 0.125%.

But take a look at the inflation indexes. The older TIPS, CUSIP 912828Z37, actually has a lower inflation index that the newer TIPS, 1.15688 versus 1.16090. Why would that happen? Because CUSIP 912828Z37 was issued in January 2020 and got hit by deflationary months in November 2019 (-0.05%), December 2019 (-0.09%), March 2020 (-0.22%) and April 2020 (-0.67%).

By the time CUSIP 912828ZZ6 was issued in July 2020, that deflationary spurt was completed. So even though it has six fewer months of inflation accruals, it has a higher inflation index.

But the interesting thing is that CUSIP 912828ZZ6 has a higher real yield: 1.21% versus 1.16% and a lower total cost of investment in $10,000 par.

Opinion: It’s a close call, but in this case I’d prefer CUSIP 912828Z37, with its higher real yield, lower inflation accrual and lower total investment cost.

Final thoughts

Sorry for this long-winded post. I hope it doesn’t add to investor confusion. Yes, a TIPS seems like it should be a simple, no-nonsense investment, offering inflation protection and capital preservation. But the deeper you dive into the TIPS market, the more complex it seems. Questions to ask before you make a secondary market investment in a TIPS:

  1. How much am I actually looking to invest? For many of these TIPS, the actual investment cost will be much higher than the par value you enter when you make the order. Adjust accordingly.
  2. What is the market real yield for the maturity I am considering? You can check the Wall Street Journal listing to get a decent idea of current trends.
  3. Do I care if I am buying a substantial amount of inflation-accrued principal that is not protected against deflation? (Some investors do care; many don’t worry about it.)
  4. Do I care if I am paying a premium price for that inflation-accrued principal?
  5. Is there a reason I would prefer a higher coupon rate (at a higher cost) versus a lower coupon rate (at a lower cost)? Or vice versa?
  6. If I am buying a small investment, am I OK with the fact that I will probably get a lower real yield based on the bid-ask spread?
  7. Is a higher real yield to maturity the overriding decision-maker for you? Or do these other factors matter?

Have additional thoughts? Post them in the comments section below.

Confused by TIPS? Read my Q&A on TIPS

TIPS in depth: Understand the language

Upcoming schedule of TIPS auctions

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Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear.Please stay on topic and avoid political tirades.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

Posted in Investing in TIPS | 23 Comments

Let’s take a look back at IVOL, a once-hot inflation-fighting ETF

By David Enna, Tipswatch.com

Back in the fall of 2020, when I was still writing for SeekingAlpha, I was getting a lot of questions about a new ETF with a tongue-twisting title: the Quadratic Interest Rate Volatility and Inflation Hedge ETF. Fortunately, everyone knew this fund by its ticker: IVOL.

The ETF’s creator, Nancy Davis of Quadratic Capital, was hailed as an innovator for this fund. Barron’s named her one of its top 200 Women in Finance in March 2020. But for me, IVOL was never particularly attractive. It was very new, with just a year of trading history. It was a fixed-income fund with a 1% expense ratio and a complex hedging strategy I couldn’t understand.

But … the interesting thing about IVOL is that it holds about 85% of its assets in SCHP, Schwab’s U.S. TIPS ETF, my favorite full-maturity-spectrum TIPS fund. On top of that, it overlays hedging strategies that seek to benefit from interest rate volatility. Quadratic’s information on the fund includes this summary of its strategy:

IVOL is a fixed income ETF that seeks to hedge relative interest rate movements, whether these movements arise from falling short-term interest rates or rising long-term interest rates, and to benefit from market stress when fixed income volatility increases, while providing the potential for enhanced, inflation-protected income.

Since IVOL launched in May 2019, we’ve certainly had a lot of interest rate volatility, but not in the way IVOL was targeting. Short-term interest rates have surged dramatically higher, while long-term rates have stabilized well below short-term rates, resulting in an inverted yield curve. So the performance of IVOL has suffered.

Remember, IVOL holds 85% of its assets in SCHP, but has an expense ratio about 25x higher than SCHP, 1% versus 0.04%. Here is a comparison of the total return for IVOL over the last three years versus SCHP, the total bond market ETF (BND) and Vanguard’s short-term TIPS ETF (VTIP).

Click on the image for a larger version.

From the chart, it is easy to see why IVOL, a shiny new invention, was such a hot fund in 2020, when it trounced the performance of similar investments, nearly doubling the return of the total bond market, 14.6% versus 7.7%. It benefited from having hedged positions that gained from falling short-term interest rates. The yield on a 13-week Treasury fell from 1.54% on Jan. 2, 2020, to 0.09% on Dec. 31.

In 2021, as both short- and long-term interest rates stabilized at very low levels, IVOL under-performed its two TIPS fund competitors by a wide margin. In 2022, when interest rates across all maturities surged strongly higher, all of these funds did poorly with the exception of the shorter-duration VTIP.

In summary, over the last three years, IVOL has out-performed the overall bond market, while under-performing the overall TIPS market. So I conclude that it has failed, so far, in its goal to provide “enhanced, inflation-protected income.” As a high-expense bond fund, I’d give it a B rating. But as a high-expense TIPS funds, it gets a C-.

A trial investment?

In September 2020 I decided to make small investments ($5,000) in both SCHP and IVOL and then track the results over time, with dividends being reinvested. But when I went to purchase IVOL, Vanguard informed me that its trading volume was too small for dividend reinvestments. I threw out that story idea and pretty much forgot about IVOL: too new, too small, too complex, and too expensive.

IVOL today

Nancy Davis still pops up often on Bloomberg and CNBC as a financial expert, and that makes sense because she has a lot of insight into the bond market. Here is a recent CNBC interview where she expresses a view I agree with: That we should see a less-inverted yield curve going forward:

A Forbes article this week took a look at IVOL, noting its celebrated launch in 2019 but mediocre performance since late in 2021. Here is a chart from the article, which is behind the Forbes paywall but also appears on MSN.com here:

Click on image for larger version.

The author, Brandon Kochkodin, has a certain way with words. Just take a look:

While others were asking whether inflation was dead, Davis was pitching her firm’s Interest Rate Volatility & Inflation Hedge ETF (IVOL). IVOL is a chimera, a lion with a goat’s head sticking out of its back. Most of its assets are held in a bond ETF that any mom or pop can buy. The rest of the money goes to options bets that are off limits to even many professional asset managers because of the sophisticated ways they offer investors of losing their shirts. It’s the options, however, that make IVOL unique and what could, if inflation expectations rise sharply and quickly enough, provide a windfall.

Davis’ timing couldn’t have been more perfect. By 2021, fretting about inflation moved from the fringe to the frontline. IVOL’s assets under management soared to more than $3.5 billion …

Nearly four years after raising the curtains … IVOL is in a rut.

Now, after attracting $3.5 billion in assets under management during its surge of popularity two years ago, IVOL today has total assets of $929.1 million. It’s daily volume is about 426,339 shares, compared with 2.47 million for SCHP and 3.46 million for VTIP.

I was wary of IVOL back in 2020, but that is my nature: I am wary of every new-fangled idea I can’t quite understand. The expense ratio of 1% turned me off. The complexity turned me off. The newness and small trading volume turned me off. That was 4 strikes, and I was out.

In coming months, if the yield curve does indeed begin widening back to normal, IVOL should do better. But it still doesn’t interest me.

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Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear.Please stay on topic and avoid political tirades.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

Posted in ETFs, Inflation, Investing in TIPS | 8 Comments

TreasuryDirect 1099s: How to find your tax forms, decipher them

And of course, because it’s TreasuryDirect, it’s complicated.

By David Enna, Tipswatch.com

If you hold Treasury issues of any kind (except possibly Savings Bonds) at TreasuryDirect, you should be getting a friendly email this week. It will say something like:

TreasuryDirect 1099 Statement Information

Dear Account Owner: Please check the Investor InBox section of your TreasuryDirect account and all linked accounts, if applicable, for important tax information.

OK, so there you go. No clickable link, which is probably a good idea in a time of escalating phishing attempts. But there is one link in the email, to a 2-minute video explaining how to find and print the 1099s for your main and linked TreasuryDirect accounts:

The video is fine, but it does end abruptly in the middle of a sentence, and makes no attempt to explain what you will actually see in the 1099s. If you hold Treasury Inflation-Protected Securities at TreasuryDirect, or if you have had maturing TIPS, there could be some complications. I’ve had many readers tell me they couldn’t find the 1099-INT for TIPS, and that they didn’t even know a 1099-OID exists, or what it is. These forms are there.

TreasuryDirect is NOT going to mail you these forms. You need to hunt them down.

Note: If your only holdings at TreasuryDirect are I Bonds or EE Bonds, and you didn’t have any matured or redeemed savings bonds in 2022, you won’t find 1099s for that year. Those savings bonds earn tax-deferred interest by default, and so there are no tax forms unless you redeemed an issue or had it mature.

1099 hunt: Step-by-step process

1. Log into your TreasuryDirect account. Simple enough, right? Yes, if you remember your password and can clear the two-step verification.

2. Go to ManageDirect. Once you log in, you will notice you have a message in your Inbox, which informs you the 1099s are available:

To view a summary of your taxable transactions, and to print your 1099, please access your account and go to the ManageDirect tab, then click the appropriate tax year under the heading “Manage My Taxes.”

Important: Once you are inside the account section of TreasuryDirect, never click on your browser’s back button. If you do, you will be booted out of TreasuryDirect and you will have to log in again. To navigate, either click on the top row of tabs or click “return” at the bottom of most pages.

To get to ManageDirect from the account home page, click on “ManageDirect” in the top row of tabs:

3. Click on ‘Year 2022’ in the Manage My Taxes section, bottom left.

This is what the ManageDirect page looks like. Click on “Year 2022” under “Manage My Taxes.”

4. Click on ‘View your 1099 for tax year 2022’ When the Year 2022 page opens, you will see a lot of information about every transaction in 2022, but what you want is the 1099, not this listing. So find the tiny little link to your 1099 and click.

5. Successfully respond to the security question. Yes, one more step before you get to the 1099. You have to answer the security question. This can be difficult if you created your account 20 years ago and your taste in movies has advanced since then …

Sometimes the security question is: “You were born in what city?” … A bit easier to answer.

6. Bingo! Your 1099 now opens. But this is not like any 1099 you’d see from any other bank or brokerage. It is long-winded (mine was 11 printed pages) and not really crystal clear. But thank God the form complies with “Paperwork Reduction Act Notices.”

7. Print it. There is no print button on this page. To print it from your computer, click on the page and then do a “CONTROL P.” (Or on a Mac, “Command P.”) That should open your computer’s print menu. If that doesn’t work, you could copy the entire thing into a Word document and then print that.

Form 1099-INT

If you hold TIPS at TreasuryDirect, you will have at least two 1099s included in these pages: 1099-INT for the coupon interest you earned, and 1099-OID for taxable inflation accruals you received in 2022. Here is what the opening lines of form 1099-INT look like.

At the very end of the 1099-INT listing, you will see the total. On your tax return, this will be entered into Box 3 on the form for 1099-INT. Correct me if I am wrong. The definition of Box 3:

The information displayed above in the 1099-INT section shows interest paid to you for tax year ending 12-31-2022. … Shows interest on U.S. Savings Bonds, Treasury Bills, Treasury Notes, Treasury Bonds and Treasury Inflation-Protected Securities (TIPS). … This interest is exempt from state and local income taxes.

Form 1099-OID

Inflation accruals for TIPS held in a taxable account are taxable in the year they were accrued, even though they were not yet paid out. These accruals are tallied in 1099-OID, with OID standing for Original Issue Discount. These are listed in another section of the 1099, and here is what the top looks like:

At the bottom is the total, which is entered into Box 8 of the 1099-OID section of your tax return. And here is the TreasuryDirect definition:

Original issue discount (OID) is the excess of an obligation’s stated redemption price at maturity over its issue price. OID on a taxable obligation is taxable as interest over the life of the obligation. If you are the holder of a taxable OID obligation, you generally must include an amount of OID in your gross income each year you hold the obligation.

For Box 8: Shows OID on a U.S. Treasury obligation for the part of the year you owned it. Report this amount as interest income on your federal income tax return. … This OID is exempt from state and local income taxes. If the number in this box is negative, it represents a deflation adjustment.

Form 1099-B

If you had a Treasury issue that matured in 2022, you may find tax information in this section, as I did for a TIPS that matured April 15, 2022. I bought that TIPS at a Dec. 21, 2017, reopening. It had a discounted price of $98.96 for $100 of value. So apparently this triggered a very small long-term capital gain. Here is how TreasuryDirect shows this, with the amounts hidden:

TreasuryDirect says these proceeds should be reported to the IRS on form 8949, part D, which is for a long-term gain, but the gain goes in Box 1f, which is for an adjustment to a gain. All of this is a bit of a mystery to me and I don’t recall getting a 1099-B in the past. But the amount is quite small. I’ll let TurboTax handle this.

What about a conventional brokerage?

I have no idea how forms 1099-INT and 1099-OID for TIPS are handled at a typical brokerage, because all my TIPS holdings at a brokerage are in a tax-deferred account. If others have information, provide it in the comments section below.

Final thoughts

It should be obvious at this point that I am no tax expert, so nothing you just read should be considered tax advice. Still, getting these 1099s from TreasuryDirect is EXTREMELY IMPORTANT. You are going to get one email with a fairly cryptic message. That’s it. Nothing in the mail. No easy-to-read tax summary like you receive from your broker. It’s up to you to go to TreasuryDirect, find the 1099s, print them, decipher them and report them on your tax return for 2022.

Happy hunting.

Confused by TIPS? Read my Q&A on TIPS

TIPS in depth: Understand the language

Upcoming schedule of TIPS auctions

* * *

Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear.Please stay on topic and avoid political tirades.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

Posted in Investing in TIPS, Treasury Bills, TreasuryDirect | 45 Comments

New 10-year TIPS auctions with a real yield of 1.22%, to apparently high demand

By David Enna, Tipswatch.com

After a week of declining yields in the Treasury market, a new 10-year TIPS auctioned Thursday with a real yield to maturity of 1.22%, a bit lower than looked likely just before the auction’s close.

This is CUSIP 91282CGK1, and its coupon rate was set at 1.125%, the highest coupon rate for any new 10-year TIPS since an auction in January 2011, which had a surprisingly similar result: real yield of 1.17% and coupon rate of 1.125%. A few months after that 2011 auction, 10-year real yields fell sharply, hitting -0.13% by August 10.

All morning, CUSIP 91282CGK1 looked likely to get a real yield of about 1.24%, and the “when issued” premarket was set at 1.26%. So the result of 1.22% appears to have been caused by high investor demand. The bid-to-cover ratio was set at 2.79, well above any recent auction of this term.

Definition: The “real yield” of a TIPS is its yield above official future U.S. inflation, over the term of the TIPS. So a real yield of 1.22% means an investment in this TIPS will exceed U.S. inflation by 1.22% for 10 years. If inflation averages 2.2%, you’d get a nominal return of 3.42%, on par with a nominal 10-year U.S. Treasury, currently 3.42%. But if inflation averages 4.5%, you’d get a nominal return of 5.72%.

Pricing

This new 10-year TIPS is a bit unique because it auctioned with an adjusted price below par value, which is fairly rare for a new offering. The details:

The key factors here are that the unadjusted price was $99.11 for $100 of value and the inflation index on the settlement date of Jan. 31 will be 0.99948. Accrued interest will be about 49.6 cents per $1,000 investment. Here is how the pricing works out:

Inflation breakeven rate

With a 10-year nominal Treasury note trading with a yield of 3.42% at the auction’s 1 p.m. close, this TIPS gets an inflation breakeven rate of 2.20%, just slightly higher than the market rate earlier in the day. This is the lowest auctioned breakeven rate for this term since January 2021. I’d say this is an attractive rate, making this TIPS appealing versus a nominal Treasury.

Reaction to the auction

This one was a bit ill-fated, with a slew of economic reports arriving this week pointing to a downturn in the economy. That is putting more pressure on the Federal Reserve to call a halt to its current hawkish interest rate increases. But a lot of this sentiment is cyclical. We could see rates rising next week. Or maybe falling.

As I have noted before, this is only the fifth TIPS auction of this term since January 2011 to get a real yield to maturity higher than 1%. There have been 72 auctions of this term over that time span, so today’s result is welcome, even if real yields dipped a bit in the closing hours.

This chart shows the market’s quick reaction to the auction’s close at 1 p.m. ET, with the broad-based TIP ETF surging higher in reaction to the apparently strong demand.

I know a lot of new TIPS investors jumped aboard this auction, and I want to reinforce my view that the result was positive for investors: A rare real return on your money surpassing 1.2%, over 10 years, while also priced slightly below par value. Of course, there will be two more reopening auctions of this issue — in March and May — and then a new 10-year TIPS will be auctioned in July. So more opportunities to come.

Here are auction results for this term over the last five years:

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Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear.Please stay on topic and avoid political tirades.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

Posted in Investing in TIPS | 50 Comments

Let’s do a quick check-in on Thursday’s 10-year TIPS auction

By David Enna, Tipswatch.com

After another day of turmoil in financial markets, real yields slipped lower Wednesday heading into Thursday’s originating auction for CUSIP 91282CGK1, creating a 10-year Treasury Inflation-Protected Security.

A lot happened, I guess. I was out of the house all day today and couldn’t follow financial developments. But here is the gloomy collection I could gather from Bloomberg’s afternoon report:

  • Growth in producer prices slid more than expected last month.
  • The drop in retail sales exceeded estimates.
  • Business equipment production slumped.
  • Microsoft Corp. plans to cut 10,000 jobs.
  • Bank of America started telling executives to pause hiring.
  • Crypto firm Genesis Global Capital is laying groundwork for bankruptcy.
  • The S&P 500 fell 1.6% in the day’s trading.
  • And … bonds rallied as yields fell in line with fears of recession.

That’s a lot to digest. The nominal yield on a 10-year Treasury note fell 16 basis points to 3.53%, according to Treasury estimates. And the real yield of a 10-year TIPS dropped to 1.25%, down 11 basis points in one day. On the secondary market, the real yield of the most recent 10-year TIPS fell to 1.23% in late trading, according to Bloomberg’s Current Yields.

It’s interesting that the market has decided to place the 10-year TIPS at the lowest point of the yield curve. On the other hand, this is the “sweet spot” of TIPS investing, and the term that is in highest demand.

So what’s ahead?

My crystal ball has become very cloudy and I have no idea where tomorrow’s 10-year TIPS auction is heading. But I went ahead and placed a brokerage order to purchase this TIPS.

As I have noted before, I am looking to fill the 2033 slot in my TIPS ladder. I looked at that ladder this afternoon. It has 18 TIPS issues with maturities from April 2023 to February 2043. Of those 18, only six were purchased with a real yield higher than 1%. CUSIP 91282CGK1 is going to be the seventh.

Better opportunities may be coming later in 2023, and I will add to my holdings if I see the chance. It looks like tomorrow’s auction will end up with a real yield somewhere around 1.25% and a coupon rate of 1.125% to 1.25%. But nothing is certain.

I will be reporting the auction results soon after the auction closes at 1 p.m. ET.

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Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear.Please stay on topic and avoid political tirades.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

Posted in Investing in TIPS | 23 Comments