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.
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.