The Treasury just completed its auction of a new 5-year Treasury Inflation-Protected security, which resulted in a yield to maturity of -1.080%.
CUSIP 912828SQ4 has a coupon rate of 0.125%, meaning that today’s buyers had to pay up for this issue – $106.38 per $100 of value.
This is the lowest rate ever for a new or reissue of a 5-year TIPS. The previous low was -0.877% for an auction on Dec. 15, 2011.
Reaction to the auction, from Bloomberg:
“There is still significant demand for inflation protection given the accommodative Fed,” said Michael Pond, co- head of interest-rate strategy in New York at Barclays Plc, one of Fed’s 21 primary dealers that are required to bid at U.S. auctions. “For the largest-ever notional tips auction at the lowest-ever real yield, the Treasury has to be very pleased with these results.”
Bloomberg points out that the auction set a 5-year breakeven point of 1.93%, versus a 5-year Treasury trading today at 0.85%. That is …
down from a year-to-date high of 2.22 on March 14. The average during the past decade is 1.94 percentage points.
I think the breakeven rate on a 5-year is pretty distorted, since you can get a 5-year insured bank CD today at about 1.75%, pushing the breakeven point to 2.83%, higher than the current 12-month rate of inflation of 2.7%, even with gas prices soaring.
Nevertheless, I think the Treasury has to be very happy about this record-low yield, and buyers should just shrug and accept a super-safe investment that is protected against an unexpected surge in inflation.
Treasury Inflation-Protected Securities 
sorry for the very long delay in responding but there are 3 ways to increase the amount of iBonds you can invest in per annum (I make no representation about accuracy or completeness):
– up to $5000 of your tax refund can be requested in the form of iBonds
– if you are married (or even in a trusted relationship), you can purchase iBonds as a gift for your partner and then gift them in future, when the partner has not already used up the $10,000 annual purchase limitation. In the meantime, the interest and inflation adjustment will accrue. You can elect a registration that transfers ownership to you should your partner pre-decease you.
– if you have an entity (small business, club, etc. — check the web site), you can set up a special account and purchase up to another $10,000 per annum.
And of course you can use iBonds for others by purchasing as a gift.
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Or look at the penfed 7 year 2.5% cd which would push up the breakeven rate to about 3.75%. Then again you have to calculate in the penfed penalty of 1 year of interesting for breaking after 5 years, so you would end up with a breakeven of about 3.25%. Kind of a difficult decision.
Bill, I totally agree a 5-year TIPS should be favored over a 5-year Treasury, which is paying just 0.82% today. A 5-year TIPS is going for -1.253% today, putting the breakeven rate at 2.073%. I am willing to bet that inflation will average more than 2.1% over the next five years.
The problem comes when you compare a TIPS to a 5-year insured CD, which could pay about 1.75%. That pushes the breakeven rate up to a rather iffy 3%. Not quite the sure bet.
FYI, PIMCO’s take on the negative yield for 5-yr TIPS:
Despite record-low real yields for Treasury Inflation-Protected Securities (TIPS) that are causing apprehension and confusion among some investors, we remain as convinced as ever that TIPS still offer potential advantages over nominal Treasuries – especially in an environment where inflation will likely reach over 2% for the foreseeable future.
In short, we believe that investors who are tempted to abandon TIPS in favor of other U.S. fixed income investments should not do so without careful consideration.
More at http://advisorperspectives.com/commentaries/pimco_42712.php
For Elliot Royce, can you let us all know how to legitimately avoid the limitations on i bonds? Thanks.
If u allow me to email u privately, i have a suggestion on how to legitimately avoid the limitation on iBonds. Always interested in informed critiques.