The U.S. Treasury has announced results of today’s reissue of CUSIP 912828SQ4, resulting in a yield to maturity of -1.286%, meaning that today’s buyers are accepting 1.286% less than the rate of inflation over the next four years, 8 months.
This is a record low for any 5-year Treasury Inflation-Protected Security, issue or reissue. The previous low was for this same TIPS, when it was first issued in April at a yield to maturity of -1.080%.
Since this TIPS has a coupon rate of 0.125% – the lowest the Treasury allows – today’s buyers had to pay more than 6.5% above actual value to get the resulting negative yield.
Although TIPS yields had been falling in recent days, demand for today’s auction was considered strong. The open-market yield for this issue had dropped to about -1.1% in recent days. The TIP ETF got quite a bounce this week:
From a Bloomberg report:
“It was strong any way you slice it,” Michael Pond, co- head of interest-rate strategy at Barclays, said. … “Clearly, yesterday’s Fed minutes have increased investors’ appetite for TIPS, particularly at the short end of the curve.”
Short-term TIPS are attractive to investors who fear unexpected inflation. Although inflation in 2012 is muted, fears are rising because of possible Fed action to stimulate the economy. Past Fed moves have boosted the prices of stocks, commodities and energy.
TIPS buyers are willing to accept a meager yield in the short term because TIPS protect against a spike in inflation, which could be devastating to the value of traditional fixed investments like regular Treasuries and bank CDs.
Breakeven rate. The rate on a 5-year traditional Treasury dropped today to 0.71%, 12 basis points below the rate of 0.83% on Aug. 16. Today’s rate results in a 5-year breakeven rate of 1.996%. This means today’s buyers will win against a traditional Treasury if inflation averages 2.0% or more over the next 5 years.
While this isn’t a bad bet, keep in mind that inflation has been running 1.4% over the last 12 months.
Still, TIPS buyers aren’t worried about sacrificing a small amount of yield today, when weighed against a spike in inflation in the future. TIPS buyers ‘gain’ from inflation.
And that is why you get a strong TIPS auction at a record-low yield.