The U.S. Treasury will auction a reissue of a 30-year Treasury Inflation-Protected Security, CUSIP 912810QP6, on Oct. 20. Although the announcement was to come next week, it is already posted in the official list of upcoming auctions.
Reissues are always interesting, because this 30-year TIPS already trades on the open market, and you can get an idea – but only an idea – of the likely yield to maturity of this auction. Here is the current status (as of Friday) of this TIPS, which matures 2041 Feb 15:
So at this point, it looks like buyers will be getting about 0.925% yield to maturity for the next 29 years. In addition, the principal of this TIPS continues to grow with the rate of inflation until it matures.
Is that a good rate? Well, sort of. If you look at the full maturity ladder of TIPS, you can see that the base rate to maturity is negative, all the way up to 2020 Jan 15, almost 10 years out. So buyers of any TIPS less than 10 years are willing to accept a return less than the rate of inflation. In that context, a payout of 0.9% above the rate of inflation looks pretty good.
On the other hand … a rate of 0.9% would set a record low – in a massive way – for any 30-year TIPS ever auctioned. Here is a chart of all the previous auctions:
As you can see, the current record low of 1.744% was set in the last reissue of CUSIP 912810QP6 (I was a buyer of that one, by the way, in June.) And this issue was first auctioned on Feb. 17, 2011 (this year!) at 2.190%.
I’m not a big fan of 30-year TIPS, because I am a buy-and-hold investor and I might not be around in 30 years. But I am a fan of 1.744% above inflation, and so I was a buyer in June on the first reissue.
This time, I will probably sit it out.
Reminder on I Bonds – act before Oct. 31.
One investment still stands out for the small investor: I Bonds. If you haven’t bought I Bonds this year, you can still buy $5,000 in Treasury Direct and $5,000 in paper bonds. A couple can buy twice that. (Paper bonds will no longer be issued after Dec. 31, except as a tax refund.)
- I Bonds currently pay a base rate of zero percent, plus a second rate based on inflation. The current inflation-adjusted rate is 4.6% for half a year, which guarantees that an investor will earn 2.3% (probably more) for the required 1-year holding period. (That 4.6% rate will change on Oct. 31, and probably fall a bit. If you buy before Oct. 31, you will get the 4.6% for six months.)
- I Bonds can be sold after one year with a three-month interest penalty, and after five years with no penalty.
- Interest payments on I Bonds are not taxed until the bond is redeemed, which can be 30 years from when they are purchased. That is a huge advantage over TIPS.
- Because of that tax advantage, I Bonds traditionally offer a base interest rate about 1% lower than a 10-year TIPS. But since I Bonds cannot go below a zero interest rate, the advantage shifts powerfully to I Bonds when TIPS are paying near zero.
- I Bonds are a much easier investment to keep track of. There are no yearly taxes due, and you can track your investments with the Savings Bond Wizard.
Treasury Inflation-Protected Securities 
Thanks for your response Mr. Enna. Like you, I consider myself a very long term investor – I just buy and hold. This strategy has been shown to outperform the active traders in many studies.
I am new to TIPS. I have only owned some for no more than a few months in my accounts and accounts of relatives that I manage for them. You’ve been investing in them for over a decade, so your insights are appreciated. I am still trying to figure out where prices and yield of existing TIPS go in different circumstances. I just can’t find a place that shows long-term prices and yield for TIPS like they have it all over for stocks. If inflation goes up a lot, say 12% a year, the price of existing already issued TIPS should go up on the secondary market, correct? After all, they will be earning you interest on a 12% greater principal. There are 30-year TIPS you can buy on the secondary market that pay you interest right now that is about 2.5% of the price you’d pay for them. They’re the ones that mature in April of 2029 – they’re all I own as far as TIPS go. (By the way, the two brokerage firms I use do not even offer 10-year TIPS on the secondary market). If Buffett is right and in the next decade or so inflation does get as bad as in the late 70s, the value (and price on the secondary market) of existing TIPS should be going up, correct? It seems really straight forward. Which is why I don’t understand the comment by the Calafia Beach Pundit that “If you expect the economy to eke out at least some degree of growth and if you expect inflation to rise, then you had better be prepared to see TIPS prices fall (since real yields would rise), even as rising inflation improved the effective nominal yield on TIPS.” I must really be missing something, because I don’t see how rising inflation can cause a decrease of the price on my existing TIPS.
Thank you for your time and wisdom!
You said that:
“I’m not a big fan of 30-year TIPS, because I am a buy-and-hold investor and I might not be around in 30 years.”
If you don’t want to hold them that long, you can always sell them on the secondary market before their maturity date. So why shun them when they offer much better return than the shorter-term tips?
Thanks
I always say I am a buy-an-hold investor in TIPS. But I have to admit it’s likely I would end up selling a 30-year TIPS I buy today. I would be 88 when they mature.
Yes, you can sell them, but I suspect it will be at a lower price than you paid for a 30-year TIPS yielding 0.99% above inflation. A ‘more normal’ yield would be well above 2.0%. Of course, these aren’t normal times and since rates have been steadily falling for a decade, you could speculate that this will continue. If rates turn and start rising, the value of your 30-year TIPS declines.
With TIPS of 10 years or less, I don’t worry about the value of the TIPS appreciating or declining. I am holding these in a ladder. In fact, I would really like to see rates rise so I can fell more comfortable making future purchases.