Next up: Reissue of a 5-year TIPS on Aug. 23, 2012

The announcement will come next Thursday  (Aug. 16), but we know the Treasury will be auctioning a reissue of a 5-year TIPS on Aug. 23.

I am guessing that this will be a reissue of CUSIP 912828SQ4, which was first auctioned on April 19 with a coupon rate of 0.125% and an auction-determined yield to maturity of -1.080%. That was an all-time low for a new or reissue of a 5-year TIPS.

Update: Here is the Treasury announcement, confirming it is a reissue of CUSIP 912828SQ4.

This one matures on April 15, 2017, and it currently trades on the secondary market at -1.227%, meaning that investors would get the rate of inflation minus 1.227% for the next five years.

Breakeven rate? The yield to maturity on TIPS is being held down, way down, by the ultra-low rates on traditional Treasuries. As of today, a 5-year Treasury is paying 0.74%, meaning a buyer of this TIPS at -1.227% will be a winner versus the traditional Treasury if inflation averages 1.967% over the next five years. I’d say there is very little risk in buying this TIPS, at least versus a traditional Treasury, which carries a rate priced for economic Armageddon.

But with a five-year TIPS, it’s better to look at other alternatives, such as:

  • I Bonds, which pay the inflation rate and can be sold after five years with no penalty. I Bonds are clearly the winner, bought up to your purchase limit – $10,000 per person per calendar year.
  • A 5-year bank CD, especially one with a minimal penalty for early withdrawal. You can find 5-year bank CDs paying around 1.75%, which pushes the breakeven rate on that five-year TIPS all the way up to 2.977%. Bank CDs are at rates we saw months ago, while Treasury rates have continued falling. Worth considering.
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4 Responses to Next up: Reissue of a 5-year TIPS on Aug. 23, 2012

  1. joe says:

    Hard to get too excited about this one. I bonds and those Penfed 5/ally 5 year/Patelco 5 year cds are better deals.

  2. joe says:

    Maybe this auction may not be so terrible. The real yields in the last 2 days have really climbed. The real yield for the 30year tip is over .5. I’m still gonna avoid it. It looks like you need to go 13 years out to get a positive real yield.

  3. tipswatch says:

    Joe, Friday’s rate was -1.106% for this TIPS, which is an improvement. While I won’t buy this auction, I can see why people might venture in. Some buyers are willing to accept under-par returns for 5 years while anticipating better rates the next time around. That reflects the ‘Apocalypse’ view that either severe recession (and deflation) is a ahead, or very high inflation in the short term. The high inflation could be out there, but in the short term? I can’t see it.

  4. joe says:

    For me, I prefer positive real rates, so I won’t buy this one. I really don’t believe deflation exists to be honest, but if it did exist TIPS does protect principle. Your right, you can’t predict unexpected inflation. But that is the premium you pay by holding TIPS. This current blip up in real interest rates is interesting. I think we will see higher mortage interest rates coming up soon also.

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