Auction on Sept. 22: Reissue of 10-year Treasury Inflation-Protected Security

Update: Yes or no on this 10-year TIPS reissue? Read my analysis.

The U.S. Treasury will announce tomorrow (Sept. 15) that it will auction a reissue of CUSIP 912828QV5, which originally auctioned on July 21, 2011, with a yield to maturity of 0.639%. It has a coupon rate of 0.625% and will mature on July 15, 2021. The auction will close Sept. 22 at 1 p.m.

Since this is a currently traded TIPS, we can get a decent idea of its likely yield to maturity on the auction date. Here is the rate as of Tuesday, Sept. 13:

The decline in Treasury yields since the original July auction has been remarkable, dropping from a an already-low 0.639% to the current rate of 0.030%. (The principal balance on a TIPS also rises with inflation until maturity, so a buyer of this reissue will get – in effect – the rate of inflation for the next 10 years.)

Is this a good investment? If you buy and hold TIPS to maturity, I would never call a TIPS investment a horrible decision. It won’t be like buying the NASDAQ just before the massive collapse of 2000. But it could mean – potentially – committing to a lousy return for 10 years. One thing for sure: You will get your money back, plus inflation.

It is important, though, to recognize that a yield of near-zero on a 10-year TIPS is an incredible anomaly. (That isn’t to say that rates could go lower, that is certainly the trend of 2011.) Here is a chart for every auction of 9- to 10- year TIPS in history, showing that the record low rate is 0.409% in July 2010, just before the Fed launched QE2:

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