The Treasury today at 1 p.m. closed out its auction of a new 10-year Treasury Inflation-Protected Security with a yield to maturity of -0.637%, a record low for any 9- to 10-year TIPS at auction.
For the record, this is CUSIP 912828TE0 and it has a coupon rate of 0.125%, the lowest allowed by the Treasury. But today’s buyers had to pay up – dramatically – for this issue, about $107.78 for every $100 of value.
The previous low for any 9- or 10-year TIPS was -0.391% for a reissue on May 17, 2012. This is the fourth consecutive auction for a TIPS in this range that resulted in a negative yield. From the Wall Street Journal report:
The $15 billion auction of 10-year Treasury Inflation Protected Securities, or TIPS, garnered mediocre interest given the negative-0.637% yield that was offered in a time of little inflationary threat. That’s the lowest yield the government has had to deliver in its sales of 10-year TIPS. It drew a bid-to-cover ratio of 2.62, the lowest measure of overall demand since September.
It might have been mediocre demand, but the government still got the highest price in history for this type of TIPS. The Treasury wins out on this one.
Breakeven rate. Since a traditional 10-year Treasury closed today at 1.54%, buyers of this TIPS will need inflation to average 2.17% over the next 10 years to beat a traditional Treasury. There lies the logic in buying this TIPS over a traditional Treasury: In a time of massive monetary stimulation and ‘financial repression,’ who wouldn’t take the bet that inflation will average more than 2.17%? That makes TIPS an attractive option.
On the other hand, inflation is currently muted. It’s likely that June’s CPI number will come in at zero, as did May’s. That is two months in a row without inflation, and that trend will drag down the overall 2012 inflation number, possibly well below 2.17%.