The Treasury has posted the auction results for today’s reissue of a 5-year TIPS.
This yield to maturity of -0.825% was right in line with what most experts were predicting. The 4-year, 8-month issue will mature on April 15, 2016.
Four months ago, this same issue was auctioned at -0.18%, which demonstrates the dramatic fall in Treasury interest rates in the last four months. This is a record-low yield for a 4- or 5-year TIPS auction, well below the previous record of negative 0.555% in October 2010.
A negative yield to maturity does not mean TIPS buyers are accepting negative returns. TIPS have a fixed coupon rate (this issue pays 0.125% on the principal total) and the principal continues to rise to match the overall Consumer Price Index. The yield to maturity is set at the auction, and in this case that is -0.825%, meaning that TIPS buyers today had to pay more than $1 for each $1 they bought.
Since year-over-year inflation is running about 3.5% right now, buyers will be getting an overall return of about 2.65% right now, which is far better than the current rate on a 5-year Treasury, running at 0.90%.
So there is some logic in buying negative-yield TIPS, but mainly that is because 1) the inflation rate could be temporarily high and 2) the Treasury nominal rates are extraordinarily low, which also could be temporary.
So there is logic in skipping this TIPS, too. I skipped it.
‘Decent’ demand. That is the verdict from Cynthia Lin of Dow Jones, who writes:
The Treasury Department’s sale of 5-year Treasury Inflation-Protected Securities, or TIPs, offered a negative yield, but was still met with a record amount of direct bidders.
The group scooped up 17.1% of the $12 billion sale, compared to a average of 2.26% in the history of the auction. Indirect bidders, a pool of buyers that include foreign central banks, also bought an above-average portion of 47.2%. An overall measure of demand as seen in the bid-to-cover ratio came in at 2.49–on par with the average.