Next up: 10-year TIPS new issue will auction July 19, 2012

The Treasury will announce Thursday that it will be auctioning a new 10-year Treasury Inflation-Protected Security on July 19, 2012.

What can we expect? The coupon rate is likely to be set by auction at 0.125%, the lowest rate possible, and the yield to maturity looks like it will be somewhere around -0.55%, judging from this similar TIPS currently trading in the secondary market:

10-year TIPS

So that means buyers will be paying up for that coupon rate of 0.125%, and will accept a yield a half percentage point below inflation for 10 years. If the rate comes in around -0.55%, it will be the record-low yield for any 10-year TIPS issue or reissue.

Here is a chart of recent 10-year auctions, and you can see how dramatically the yield to maturity has fallen – it was 1.920% just three years ago and still-positive in November 2011:

10-year TIPS history

It’s hard to get excited about this 10-year issue, with a yield driven down by worldwide economic turmoil, plus anticipation of further Federal Reserve action to stimulate the economy. The Fed has committed to keeping rates very low through the end of 2014, so we aren’t likely to see dramatic rate changes in the near term. Still, a 10-year yield zero above inflation seems more reasonable.

Breakeven point? The 10-year traditional Treasury as of Friday was yielding 1.57% (inching toward the 2012 low of 1.47%). That means a TIPS yielding -0.55% would need to have inflation average 2.12% over 10 years to win out over a traditional Treasury. That is in the lower-end of the breakeven range over the last year:

10-year breakeven rate

Source: Reuters

Given the super low rate on a 10-year Treasury, the breakeven rate is tolerable and I’d say it makes the TIPS preferable to 10-year Treasury. If you are looking to park cash for 10 years with supreme safety and can accept very little or zero real growth in your investment, this TIPS will work.


  • I Bonds purchased up the the yearly maximum ($10,000 per person at Treasury Direct) remain the best option. They pay the rate of inflation and can be sold after one year with only a minimal penalty, and after five years with no penalty, plus taxes are deferred.
  • A 5-year bank CD can pay around 1.75%, creating a breakeven rate over 5 years of 2.3% compared with a 10-year TIPS paying -0.55%. Plus, it will mature in 5 years, or you can unload it early with a penalty. Because of the recent economic slowdown, inflation is muted (it turned to deflation in May and may be negative again in June). I’d say a bank CD competes pretty favorably.

About Tipswatch

Author of blog, David Enna is a long-time journalist based in Charlotte, N.C. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website.
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5 Responses to Next up: 10-year TIPS new issue will auction July 19, 2012

  1. Pingback: It’s official: Details of 10-year TIPS auction on July 19, 2012 | Treasury Inflation-Protected Securities

  2. tipswatch says:

    Finding acceptable yield right now, along with high safety, is very difficult. A lot of great financial minds seem to be saying accept painfully low yields now in the short term, but make sure you have flexibility to leave that investment and move into higher yields in the future. I Bonds are perfect for this, you get the rate of inflation for one year and can then sell with a very small penalty. Some banks offer attractive withdrawal penalties on CDs, so these are also good options in this strategy.

  3. joe says:

    Your probably right about the cd situation. What I was trying to say is the 10 year TIPS being auctioned this month by the treasury is not that great of a deal compared to other options we have. I bought a lof of the .625% 30 year TIPS in February. So far with inflation around 2% this year, I am looking about 2.6% or so which seemed at the time to be better than the cds being offered. Last year I bought a bunch of the 30 year TIPS in February 2011 with a yield of 2.125%. Last year with inflation at 3.3% I made about 5.425%, so that was a pretty good deal last year since the stock market made about 2% with the dividend.
    My investment goal is to buy the highest yielding safest investment at the time I have extra money to invest. I don’t really care about what I invest in, just that it is safe and is the highest yielding choice at the time.

  4. tipswatch says:

    Joe, I notice that Penfed also has a 5-year CD at 1.88%, better the the 1.75% top rate I mentioned in the article. But the 5- and 7-year CDs come with a 1-year interest penalty for early withdrawal, so weigh that against Ally’s 1.75% 5-year with a 60-day interest penalty. I would definitely go with Ally for the 5-year, at least.

  5. joe says:

    This TIPS issue sucks. I think you are better in a penfed 7 year 2.4% cd over this 10 year TIPS. And you can get 250k insurance worth on it. I just don’t see the point of the individual investor buying this issue.

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