Yield on 30-year TIPS? Ouch.

Note: I have posted updates on the 30-year TIPS’ likely yield

Next week, on June 23, the U.S. Treasury will auction a reissue of 30-year Treasury Inflation-Protected Securities. The formal announcement came today: It is a 29-year, 8-month issue, meaning it is Cusip 912810QP6, which was first issued in February 2011.

February 2011 … so long ago … you might not remember that this TIPS auctioned four months ago with a real yield of 2.130%. It has a coupon rate of 2.125%.

In only four months … The real yield on TIPS has declined sharply, mainly for this reason: A rising fear of inflation. When inflation fears rise, investors are willing to pay more for TIPS, and accept a lower real yield, because TIPS investors ‘benefit’ from higher-than-expected inflation. The other contributing factor is turmoil in Europe over the potential for a Greek default. That pushes investors toward the safety of U.S. Treasuries.

On Wednesday, we got a double whammy: The May CPI number came in higher than expected, and fears spiraled that Greece will default on its debt.

And this was the result at Wednesday’s end:

The likely yield on the 30-year TIPS to be issued June 23 declined sharply – now sitting around 1.757% – reversing a positive trend in yield that was making next week’s auction more appealing.

Here was the yield at the end of Tuesday:

So in one day, the yield dropped 0.056%. Like I said … ouch.

Keep in mind that four long months ago, you could have bought this 30-year TIPS with a real yield of 2.13%, with any future inflation building your principal over 30 years.

Makes you sort of nostalgic for the long-lost days of February.

At this point … I still would not rule out investing in this 30-year TIPS reissue, but I think it’s important to keep an eye on the potential yield. If it rises back toward 2%, this TIPS is a lot more attractive.

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2 Responses to Yield on 30-year TIPS? Ouch.

  1. I think this is a very useful site. I’ve added a link to it at the Inflation-Indexed Investing Association’s website (www.inflationinfo.com) . Keep up the good work.

  2. Pingback: Treasury Inflation-Protected Securities

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