It’s official: Details of 10-year TIPS auction on July 19, 2012

The U.S. Treasury today announced details of the upcoming 10-year auction of a new issue Treasury Inflation-Protected Security. It will be forever known as CUSIP 912828TE0.

View the Treasury announcement.

Details: The coupon, or base rate, of this TIPS will be set at auction, but we can say with certainty it will be 0.125%, the lowest rate possible. In addition, buyers will see their principal grow at the rate of inflation until maturity on July 15, 2022.

The actual yield to maturity will be set at the end of the auction, 1 p.m. on Thursday, July 19. As of today, a similar TIPS that matures 2022 Jan 15 is trading on the secondary market with a yield to maturity of -0.627%.

If this new TIPS auctions next Thursday anywhere near this yield, it will be the lowest yield ever for a 10-year TIPS issue or reissue. The previous low was -0.391% for a reissue auctioned on May 17, 2012.

(It’s important to note for buyers of this TIPS that you will be paying up, dramatically up, to get that base rate of 0.125%.)

Want more historical perspective? Read this.

At this point, this auction is shaping up to be spectacularly undesirable for the small-scale investor. Who wants to accept 0.6% less than the rate of inflation over the next 10 years?

On the other hand, investors can choose similarly spectacular disasters, such as a 10-year traditional Treasury yielding 1.50% today. If you buy that, you are pretty much betting on economic Armageddon. At least with the TIPS you get the side benefit of gaining from whopping unexpected inflation, as undesirable as that would be.

For me? Observe it in awe. But don’t buy.

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6 Responses to It’s official: Details of 10-year TIPS auction on July 19, 2012

  1. joe says:

    So I ask, who would buy this? I don’t think an individual investor would find this interesting. Like I said, I feel at some point the 30 year TIPS could go negative as far as the real yield. Now that would be a site to see.

  2. Bill Marshall says:

    Supposedly, the nice thing about a bond ladder is that it runs on “auto-pilot”. I guess not with TIPS ladders. I think I’m going to miss a rung here, put the money into 5-yr CDs (holding my nose, they’re also a terrible rate), and plan to purchase the 7/15/2022 TIPS in the secondary market when the CDs mature.

  3. tipswatch says:

    Bill, the ladder bit me this year because I had a 10-year TIPS maturing; it was paying about 2% over inflation. Replacing that issue would mean dropping well below the rate of inflation for the next 10 years. If you can find a 5-year CD with a minimal early withdrawal penalty, you can at least get out of that lousy rate (about 1.75%) when conditions change. I am also looking at something like Vanguard’s Short-Term Corporate Bond Index Fund Signal Shares (VSCSX), which is paying a yield of about 1.8% now. But it does have a purchase fee of 0.25%. That fee benefits fund shareholders, but makes it slightly less attractive for a short-term investment.

    • Bill Marshall says:

      In my mind, even the 7/15/2022 issue of TIPS return at the rate of inflation for the next 10 years (actually 0.125% over the inflation rate). But there is a one-time “Bernanke tax” that we pay at the time of the purchase. This tax gets paid either out of the current year’s budget, or out of the qualified account. I think this is a different way of looking at the negative yield. Current tax is about 7%, and that (I think) is too high. The end result is the same — pass.

  4. tipswatch says:

    Bill, I do like your logic on the ‘Bernanke tax’, but the end result is the same … pass on this issue. (I use that same logic for holding TIPS in taxable accounts. Pay tax now, or later? I can afford it now.) If we are passing on this issue, who is buying? Big investors – foreign nations, pension funds and very large hedge/mutual funds – that need the inflation protection.

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