Auction coming July 21: 10-year Treasury Inflation-Protected Security

Update: Yes or no on this 10-year TIPS auction?

The U.S. Treasury announced today that it will auction $13 billion in a new-issue 10-year TIPS, Cusip 912820YP6. The Treasury announcement does not say what the ‘coupon rate’ will be on this issue (it will be set at the auction, very close to the real yield). The coupon rate is what the TIPS actually pays for 10 years, in addition to adjustment of principal to match the inflation rate.

The issue date is July 29, 2011. The TIPS mature July 15, 2021.

The real ‘yield to maturity’ will be determined at the auction July 21, at 1 p.m. The yield to maturity is set by the market … buyers pay more, or less, than the par value to buy a TIPS at auction. That sets your real yield. But in this auction the two rates (coupon and real) will be very close.

Right now, it looks like the yield to maturity will be about 0.527%, which was Friday’s market rate for a 10-year TIPS maturing Jan. 15, 2021. This one should be close to that.

Buy it, or not? I’ll try to examine this more closely later this week, but right now my feeling is to skip this TIPS issue. There is way too much going on the in the markets right now (threat of a U.S. defaut, crisis in Europe, weak economy, etc.) to be enthusiastic about a 10-year TIPS that might pay just 0.5% above the rate of inflation.

This is the last new issue of the year, but you will get several more chances to buy reissues; in fact, there is an auction every month of this year. Ten-year reissues will come up in September and November.

And, of course, your first $5,000 (or $10,000 or $20,000, depending on if you mix paper and electronic purchases) should be in I Bonds, anyway, if you haven’t invested in them this year.

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