Next TIPS auction: 10-year reissue auctioning Nov. 17, 2011

The U.S. Treasury has announced that the 10-year TIPS auction set for Nov. 17 will be a reissue of CUSIP 912828QV5, which originally auctioned on July 21 with a coupon rate of 0.625% and a yield to maturity, before the inflation adjustment, of 0.639%.

Back in July, I was wary of the new issue because it looked like it would auction below 0.5%. Boy, I was wrong about that! It ended up that this 10-year was quite attractive. The yield at auction ended up higher than predicted, and since then, TIPS yields have been plummeting.

Here’s the current picture for CUSIP 912828QV5:

CUSIP 912828QV5The yield to maturity is slightly negative, at -0.08%, meaning that investors today are willing to accept -0.08% less than the rate of inflation over the next 10 years.

Buyers of the Nov. 17 reissue are going to have to pay about a 6% premium to get this issue’s 0.625% coupon rate. That means a $1,000 investment is going to cost you $1,060, resulting in a yield of about -0.08%.

(That rate might not hold, however. The European debt crisis and turmoil today in the world stock markets will assure higher Treasury prices today. You can check daily TIPS prices here.)

The case for CUSIP 912828QV5. If you are buy-and-hold TIPS investor, and need to place money in a super-safe investment, this issue might still be attractive. You have few alternatives:

  • The standard 10-year Treasury today is paying 2.1% (and that could dip again this week). If you think inflation will run higher than 2.18% over the next 10 years, this TIPS is a more attractive investment.
  • The best 5-year CD you can find today is paying 1.89%.
  • The standard 5-year Treasury is paying 0.92%

I think 10-year issues are the ‘sweet spot’ TIPS investment, giving you some advantage in yield over shorter-term issues, plus they are excellent for use in a TIPS ladder, with your TIPS maturing every year in the future. (Nowadays, the 30-year TIPS is the sweet spot for yield, but lousy for a ladder for the buy-and-holders.)

If you are TIPS ‘trader,’ I can’t see buying this TIPS for quick capital gain. You should have bought it back in July.

The case against CUSIP 912828QV5. As an old-time TIPSter, I know that the ‘normal’ yield for a 10-year TIPS is in the 1.5% to 2.5% range, and I do believe we will return there if the U.S. economy gets back into growth mode. (When? In my lifetime?)

This same TIPS was reissued a month ago with a yield of 0.078%, which broke through the record low by a wide margin. One month later, the yield has fallen another 16 basis points, and could go lower by next week.

Here’s a look at every 9-to 10-year TIPS ever issued (the yield column is where you need to focus to appreciate the historical trend):

There has never been a 10-year TIPS issue or reissue with a negative yield. Will the Nov. 17 reissue finally break through this barrier?

Keep watching.

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One Response to Next TIPS auction: 10-year reissue auctioning Nov. 17, 2011

  1. Vijay says:

    Thanks for this very helpful analysis.

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