On Thursday, April 21, the Treasury plans to sell $14 billion in five-year inflation-protected securities. The dated date is April 14, 2011, while the issue date is April 29. The TIPS mature April 15, 2016. Cusip number is 912828QD5.

Noncompetitive tenders must be received by 11:00 a.m. Thursday, and competitive tenders by 11:30 a.m. You can learn more at TreasuryDirect.gov.

Here is a .pdf with full details of the auction.

This is an original issue, not a reissue.

What kind of interest rate will I get? Not much in the base rate, which the Treasury pays you twice a year, but your principal will rise with inflation over the five years. At maturity, you will be paid your original investment plus inflation, except that …

This five-year TIPS will probably go off at a negative yield, somewhere around -0.2%.

Negative interest? It sounds crazy, doesn’t it? But it has been happening for shorter-term TIPS since last fall.

How does that compare with a regular 5-year Treasury note? The regular 5-year note currently pays 2.22%, which is better than a money market fund, but rather pathetic. The Fed’s current 5-year inflation prediction is about 2.1% per year on average, you can insert your chuckles … here. I expect it will be higher, but the key thing is, how much higher?

Why accept negative interest? It only makes sense if you expect inflation over the next five years to be higher than 2.4%, which is the the rate you get by taking the regular 5-year Treasury and adding on the negative 0.2% (or possibly 0.3%, depending on how the auction goes — and I honestly, I am unsure on how to predict what will happen Thursday.)

I did notice this: The University of Michigan’s median 5-year expected inflation rate jumped 0.3% in March to 3.2%, the highest reading since May-June 2008. Source.

If inflation ran at 3.2% over the next five years, this TIPS would be paying nearly 3%, and that is a lot better than the standard 5-year Treasury.

Conclusion … It’s hard to accept the possibility of a negative base interest rate on a 5-year TIPS, when long-time investors are used to base rates closer to 2%. Then again, what rate are you earning on our money-market fund? Or would you be willing to get 2.22% on a five-year Treasury? I wouldn’t.

Hold your nose and buy this 5-year TIPS? I am betting on the side of higher inflation and I say yes — but it will be a minimal investment. It can’t turn out too bad. I will hold to maturity.