Update: This 5-year TIPS was auctioned April 21 with a base yield of -0.18%.
Although the base rate of the 5-year TIPS being auctioned Thursday (April 21) will be ‘positive’, the resulting yield from the auction will be negative. How does that happen? Bidders will have to pay more than $1 for $1 of principal.
In other words, as an example, you would pay $10,025 for $10,000 of this TIPS, which in effect lowers your real yield.
The auction will probably carry a coupon of 0.125%. That is the base rate. In addition, the principal of a TIPS increases with inflation until it matures.
This is what Marketwatch is reporting today:
Yields on 5-year inflation-linked Treasury bonds are currently trading below zero, but Thursday’s auction of the new security will carry a positive coupon, analysts at TD Securities said Wednesday. That will still make this the second 5-year Treasury Inflation Protected Securities auction with a negative yield, as low yields on regular Treasury securities and higher inflation worries keep up demand for TIPS.
“The real yield of -20 to -25 basis points at auction will just mean that the price is further over par,” said Richard Gilhooly, director of rates strategy at TD Securities.
A real yield of -0.25% would be better than some predictions of -0.5% to -0.7% I have seen in recent days.
Update: The Wall Street Journal reports on April 21:
The Treasury Department has had to make some rule changes to deal with soaring demand for its inflation-indexed securities, which had raised the technical possibility of a negative interest rate coupon in one of its auctions. The rule change, which went into effect on April 1, placed a minimum rate of 0.125% on all Treasury securities that pay an interest coupon, assuring investors that they could never face the unpleasant task of writing the Treasury a check in return for the right to lend it money.
Update: Bloomberg’s prediction is for a yield of negative 0.1825%:
The government’s sale of $14 billion of five-year Treasury Inflation Protected Securities, may draw a yield of negative 0.1825 percent, according to the average forecast of 6 of the Federal Reserve’s 20 primary dealers in a Bloomberg News survey.