The U.S. Treasury, at 1 p.m. Thursday, will auction $13 billion in a new-issue 10-year Treasury Inflation-Protected Security, Cusip 912820YP6.
Buy it: Yes or no? I say no. Here is Tuesday’s quote for the 10-year TIPS that will mature in January 2021, six months before this new issue will mature:
|Maturity||Coupon||Bid||Asked||Yield to maturity|
|2021 Jan 15||1.125||105.27||105.32||0.479|
0.479%, not good enough. Does this real yield, 0.479% above the rate of inflation, look appealing? It does not.
The yield has fallen dramatically in recent weeks. The 10-year TIPS auctioned in May went at a yield of 0.887%, hardly wonderful, but much better than 0.479%. On June 29, three weeks ago, the market yield was at 0.676%. Amazing.
This auction could threaten a record-low yield for a 10-year TIPS. Here are the auction yields for every 10-year TIPS ever issued or reissued:
I highlighted the record low yield, 0.409% in November 2010, and the record high yield, 4.25% in January 2000. It’s worth noting that only three auctions, all recent, have ever gone under 1%.
Of course, we don’t know what kind of appeal Thursday’s issue will have. But I can’t imagine high demand at a time when the Treasury is facing a threat of default (unlikely, I hope) in 12 days. In addition, this is the first recent TIPS auction without the artificial demand of QE2. Maybe the yield will end up substantially higher. But as I have said before … don’t fool yourself into thinking you can predict a TIPS auction.
Still wavering? Thursday morning, recheck that Jan 2021 yield on the Barron’s chart. TIPS had a crummy day Wednesday, with the TIP ETF falling 0.57%. The 10-year yield likely rose nicely. Make the call after seeing the closest market yield.
Update: Wednesday’s yield to maturity for the Jan 2021 TIPS closed at 0.550%, up substantially. This could be an very interesting auction today. The coupon rate would likely be 0.5% and the TIPS could go at a slight discount to par.
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.
Would this 10-year TIPS be a horrible investment? No, it would be fine. Here’s the thing: Do your thinking about TIPS before you buy. After you buy, forget it. If you are holding to maturity, you will do fine. Buy it and forget it.