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.