It’s certainly been an ‘interesting’ year for TIPS, with yields at somewhat attractive levels through the first half of the year and then plummeting to record lows in the second half. Here’s a look at the month-by-month auctions in 2011. Are there some lessons for investors here?
CUSIP 912828PP9
Jan. 20, 2011: A new 10-year TIPS issue is auctioned with a coupon rate of 1.125% and a yield to maturity of 1.170%. At the time, this looked like a mediocre yield, but still somewhat appealing. Today, it looks like a steal.
March 24, 2011: CUSIP 912828PP9 is reissued as a 9-year, 10-month TIPS and auctions at a yield to maturity of 0.920%.
May 19, 2011: It is again reissued as a 9-year, 8-month TIPS and auctions at a yield of 0.887%.
Looking back, all three of these auctions were winners for buyers.
CUSIP 912810QP6
Feb. 17, 2011: A new 30-year TIPS issue is auctioned with a coupon rate of 2.125% and a yield to maturity of 2.190%. This ends up being the most attractive issue of 2011.
June 23, 2011: CUSIP 912810QP6 is reissued as a 29-year, 8-month TIPS and auctions with a yield to maturity of 1.744%. Still very attractive, in our new low-rate world.
Oct. 20, 2011: This same TIPS is reissued with a 29-year, 4-month term and auctions at 0.999%. Not so attractive.
In seven months, the 30-year TIPS yield dropped from 2.19% to 0.999%. Amazing.
CUSIP 912828QD5
April 21, 2011: This new 5-year TIPS is auctioned with a coupon rate of 0.125% and a yield to maturity of -0.180%. At the time, this auction made headlines: BUYERS ACCEPT NEGATIVE INTEREST ON TIPS! Several financial columnists derided buyers as fools. I was a buyer, and I didn’t feel foolish.
August 18, 2011: CUSIP 912828QD5 is reissued as a 4-year, 9-month TIPS and auctions at a yield to maturity of -0.825%. That rate is seriously negative, and buyers seem to be signalling either 1) Armageddon or 2) high inflation is coming.
December 12, 2011: The last reissue of the year is a 4-year, 4-month TIPS that auctions at a yield of -0.877%. Again, seriously negative and very unattractive when compared with I Bonds for the small investor.
CUSIP 912828QV5
July 21, 2011: The last new issue of the year is a 10-year TIPS with a coupon rate of 0.625% and it auctions with a yield of 0.639%. Not so bad for buyers, especially since it looked like this issue might go off around 0.47% a few days earlier.
Sept. 22, 2011: CUSIP 912828QV5 is reissued as a 9-year, 10-month TIPS and it auctions with a yield of 0.078% — getting very close to a real yield of zero.
Nov. 17, 2011: It is again reissued as a 9-year, 8-month TIPS and auctions with a yield of 0.099%, still very close to zero but above the September auction.
Conclusions
If you were a TIPS trader – which I am not – those early-year purchases would have been profit machines. The lesson is that rates went down sharply in the second half of the year. Next year, could we see the reverse, with rates very low in the first half of the year and then rising in the second half?
It is possible. Keep that in mind.
As a buy-and-hold TIPS investor, and a net buyer of TIPS (buying more than mature each year) I would love to see higher rates. The current trend, though, is down and may stay down until the overall interest rates begin rising or the economy shows dramatic improvement.
Treasury Inflation-Protected Securities 
Matthew, right now that Jan. 19 auction would go off at about -0.188% yield to maturity, which isn’t great for a 10-year commitment. I believe that would be a record low, I don’t think any 10-year auction has gone negative. But things change, especially with new issues. I suspect the rate won’t end up negative. I use this link to track current rates for TIPS:
http://online.barrons.com/mdc/public/page/9_3020-tips.html?mod=bol_topnav_9_3000
I’ll be looking at that 10-year more deeply before the auction. I normally love 10-year issues, and I have one maturing in January (ouch). My first investment of 2011 will be in I Bonds up to the limit, however.
What are your thoughts regarding the January 15, 2012 10 year issue? I made a profit selling Tips in 2011, but now have a lot of cash sitting around. Also, what can you tell me about the Tips auction – should I buy then or wait until the price is known a few days later?
Thanks again, I love your site.
Matthew Poskonka