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.
Treasury Inflation-Protected Securities 
Tipswatch — I hear you on “buy and forget it”. I’ve been doing that for years to build out a 30-year ladder which anchors the ‘safe’ allocation within my portfolio.
But I have a bit of a wrinkle I’d like to ask you about —
I recently noticed that the longer-duration 30yr notes that I bought at auction just over the last two years have appreciated considerably. For example, a 30-year TIPS note with a 2.13% coupon maturing in 2/14/2040 is currently trading at almost 30% above what I paid for it. In other words, if I sold, I’d achieve 12+ years of coupon payments in one fell swoop.
Even the recent 10-yr that clocked in at 0.639%. I bought, spending $10,008 on a note that is now trading at 10,436. If I were to sell it, just a month latter, I’d net $429, or almost 7 years of coupon payments at once. I figure I could just double up the next time 10-years go to auction.
I’m tempted to do this. . . am I missing something? Obviously if I sell I’m left with some gaps in my ladder.
Thanks —
Drew, I can see the quandary. I also have some older TIPS that pay a real yield of more than 2% and even 3%. I consider those prized assets, but they are aging. I have one issue that pays a coupon of 3.875% and matures in April 2029. No way would I sell that one.
But there is logic to what you are saying, since you can sell and reap a large amount of future interest payments in the form of instant capital gains. My cautions would be: 1) make sure you get the price you want since TIPS in the open market are thinly traded, and 2) understand that you may never – at least for several years – be able to replace those higher-yielding issues. The real yield on TIPS has been declining for years and that decline has even escalated recently. Eventually, we will hit bottom and start back up. But you are right that this is a great selling opportunity.
On that 10-year paying 0.639%, that is a yield you could easily see again in a few months. So selling it, if you can get a good price is a non-issue.
I say buy and forget TIPS because I need those higher-yielding issues to balance off some of these more recent lower yields. As of today, I wouldn’t be a buyer of TIPS. The rates are ridiculously low for all Treasuries and that eventually has to turn. If this really is a bubble, selling and getting your profit now does make sense, especially for a 10-year yielding 0.639%!