Stocks are plummeting: Interesting day for a TIPS auction

Update: This 5-year TIPS reissue auctioned at negative 0.825%.

Stocks looking punk. The Dow Jones Industrial Average is down 430+ points this morning, on the day that the Treasury is auctioning a reissue of a 5-year TIPS, CUSIP 912828QD5. That reissue was already likely to generate a record low for a 4- or 5-year TIPS. This TIPS, which matures in April 2016, was going for a yield to maturity of negative 0.856% yesterday. (The record low was negative 0.555% in October 2010.)

A decline in the stock market doesn’t necessarily mean lower TIPS yields, but in recent days of volatility, a lower stock stock market has triggered lower TIPS yields as investors move to safe havens.

Mixed news on inflation. Also out today is a bump in overall consumer inflation, but a dip in core inflation:

The Labor Department says the Consumer Price Index rose 0.5 percent in July, following a drop of 0.2 percent in June. Gas prices accounted for much of the swing. They increased by a seasonally adjusted 4.7 percent after dropping sharply in June. The core index, which excludes volatile food and energy, rose 0.2 percent. That’s below the 0.3 percent rise in each of the previous two months.

Thursday’s report showed that on an annual basis, consumer prices were up by 3.6% in July, above the Fed’s target. But stripping out energy and food, inflation was only 1.8% higher over a 12-month span.

Could this TIPS go for negative 1%? One thing I know: I can’t predict a TIPS auction. But I would guess against negative 1%. Let’s see how bad things get today.

Inflation Trader blogger Michael Ashton weighed in on the auction last night:

With the Fed pinning the 5-year nominal Treasury at 0.90% at the moment, consider that even with the real yield of the 5y TIPS bond at -0.85%, all you need to be indifferent is for inflation to average about 1.75% over the next 5 years. … You would be hard-pressed to underperform 5-year nominal Treasuries over the next five years.

The auction results will come at 1 p.m.

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