The Treasury just posted the results for CUSIP 912828SA9, a 9-year, 10-month reissue.
The previous low for any 10-year TIPS issue or reissue was this same CUSIP 912828SA9, first issued on Jan. 19. It went off two months ago at -0.046%, the first 10-year TIPS in history to auction at a negative yield.
Since this TIPS carries a coupon rate of 0.125%, buyers at today’s auction had to ‘pay up’ for the purchase, about $102.22 for every $100 of value, and that’s up from the $101.66 buyers paid two months ago.
About that negative yield … it’s not really negative. The principal balance of a TIPS issue continues to grow with inflation until maturity. In effect, buyers of today’s new issue were accepting the rate of inflation minus 0.089% for 10 years. If inflation averaged 2.5% over the next 10 years, TIPS buyers would be getting 2.411% on their investment. The 10-year traditional Treasury was paying 2.29% today. Pick your poison.
Reaction to the auction, from Bloomberg:
“We are continuing to see inflation expectations gather steam,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 21 primary dealers that are required to bid at the sale. “With energy prices running hot the market has priced in inflation over the next 10 years.”
As I have said in previous posts, you should ignore the talk that TIPS are moving into a bear market, along with traditional Treasuries. TIPS are showing surprising strength, too much strength in my opinion. But that is what the fear of inflation does to TIPS investments.
(Bear market = buyers market. We aren’t in one.)
If … if … if … rates on traditional Treasuries continue to climb (no sign of that this week), TIPS yields will be dragged higher. As the 10-year Treasury climbs, the 10-year TIPS rate cannot continue below zero. That won’t happen, because buyers … at the least … will move to traditional Treasuries.
So right now, we are in this limbo, with TIPS setting an all-time low today. There it is.