10-year TIPS auctions at a record low -0.75%

The U.S. Treasury just announced that its reissue of a 10-year TIPS auctioned with a record-low yield to maturity of -0.75%. This is CUSIP 912828TE0, which will mature on July 15, 2022.

The previous record low was for this same Treasury Inflation-Protected Security, when it was first auctioned in July with a yield of -0.637%.

Breakeven rate. The 10-year Treasury closed today with a yield of 1.80%, setting the inflation breakeven rate for this TIPS at 2.55%. This means that inflation will have to average 2.55% for the next 10 years for this TIPS to beat a traditional Treasury. This is a near record-high breakeven rate (I think the record is 2.64%) for a 10-year TIPS, as shown in this chart from Michael Ashton’s E-piphany blog:

TIPS breakeven rate

The higher the breakeven rate, the more expensive the TIPS. Buyers were paying a lot at today’s auction, that is clear. (And I should point out that this same TIPS, when it first auctioned in July, had a much more modest breakeven rate of 2.17%.)

Reaction. The Wall Street Journal cited ‘lukewarm‘ support for this auction, despite the record-low yield. The article notes:

TIPS shield owner from inflation because their payouts increase as the consumer price index rises. But without inflation, buying at a negative yield means the investor will get a smaller amount of money paid back than originally lent out.

Because of newfound inflation concerns, prices on TIPS have soared recently–but perhaps so much so that it made Thursday’s auction a bit too expensive, analysts say.

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14 Responses to 10-year TIPS auctions at a record low -0.75%

  1. James says:

    Nice website on TIPS. Just wondering, how does the math work on today’s auction of 10 year TIPS. How does a -.75% yield and a .125% coupon work out to a price of around 108. My math is a bit rusty.

    • Technically, the (full) price equals the sum of the cash flows discounted by the yield to maturity. With TIPS, we do the math in real space so we can ignore the inflation accretion to date and not worry about what will accrue in the future. So you discount 20 coupons of 0.125% and a terminal payment of 100%, at a rate of (1 + -0.75%)^t . Note that since you’re discounting at a negative number, the coupon actually increases in value in real space! On Excel, it’s PRICE(SettlementDate,Maturity,Coupon,Yield,100,2,1), where in this case SettlementDate is 9/28/2012, MaturityDate is 7/15/2022, Coupon is 0.125%, and Yield is -0.75%.

  2. tipswatch says:

    James, I was good at math … a long time ago. Anyway, I can get close to an answer. Since you will be getting 0.125% on this TIPS for 9 years, 10 months, but your actual yield to maturity is -0.75%, you had to pay for 0.875% yield upfront, over 10 years. It looks like you paid $108.52 for $100 of value, which might work out pretty close for 9 years, 10 months … you’ll get $8.52 in extra interest for every $100 invested? That’s my theory.

  3. James says:

    Thank you for the replies. Very informative. My Excel didn’t want to accept a negative yield but using .87% for the coupon and 0% for the yield brought me to the price.

    • Ha – Oops, my bad. Your method will get you pretty close, but I forgot that Excel has that glitch. I wrote my own function to handle the case of negative yields. If you want to, you can use it:

      Function TIPSPricefromYield(Settlement As Date, Maturity As Date, Coupon As Double, Yield As Double)

      Dim price As Double

      If Yield > 0 Then ‘then we don’t need anything different!
      price = WorksheetFunction.price(Settlement, Maturity, Coupon, Yield, 100, 2, 1)
      GoTo done:
      End If

      accumulator = 0
      firstcoup = WorksheetFunction.CoupPcd(Settlement, Maturity, 2, 1)
      priorcoup = firstcoup
      Do Until priorcoup = Maturity
      nextcoup = WorksheetFunction.CoupNcd(priorcoup, Maturity, 2, 1)
      If accumulator = 0 Then
      x = (1 – AccrualFrac(priorcoup, nextcoup, 3, Settlement, 2)) / 2
      Else
      x = x + 0.5
      End If
      pvcashflow = Coupon * 100 / 2 / (1 + Yield / 2) ^ (2 * x)
      accumulator = accumulator + pvcashflow
      priorcoup = nextcoup
      Loop

      ‘add maturity flow and last coupon
      accumulator = accumulator + 100 / (1 + Yield / 2) ^ (2 * x)
      ‘subtract accrued int
      price = accumulator – WorksheetFunction.AccrInt(firstcoup, WorksheetFunction.CoupNcd(firstcoup, Maturity, 2, 1), Settlement, Coupon, 100, 2, 1)

      done:
      TIPSPricefromYield = price
      End Function

    • Bill Marshall says:

      I do my estimated price calculations using an excel formula derived from the equations given in the Federal Register. It includes accrued interest, and handles reopenings after the first semi-annual interest payment. It is almost accurate, within about a penny per $1K par value. I’ve never tried tracking down exactly why it isn’t perfect, but I assume it has to do with excel not using enough precision in the calculations. Here’s the monster (formula is for row 53 of the worksheet):
      H53*10*(G53/F53)*(J53/0.02+(J53/0.02)*(1-(1/(1+I53/2)^(INT((E53-C53+15)/182.5+0.9)-1)))/(I53/2)+(1/(1+I53/2)^(INT((E53-C53+15)/182.5+0.9)-1))*100)/(1+(IF(D53=C53,182,MOD(D53-C53,182))/182)*(I53/2))
      C53 is the issue date, 9/29/2012
      D53 is the dated date, 7/15/2012
      E53 is the maturity date, 7/15/2022
      F53 is ref CPI for the dated date, given in the offering announcement, 229.93606
      G53 is ref CPI for the issue date, given in the offering announcement, 229.14140
      H53 is the number of bonds, at 1,000 per bond
      I53 is the auction rate, here -0.75%
      J53 is the coupon rate, lately always 0.125%
      result for this auction is $1085.46 per $1k par.

  4. Mark says:

    You can also just goal seek in excel to find a negative irr on the cash flows for the tips assuming zero inflation.

  5. tipswatch says:

    OK, then, you folks can keep discussing this, you lost me when you used that > sign. Still, Thanks Michael Ashton, for contributing, since I follow your every word. I highly recommend Michael’s blog …http://mikeashton.wordpress.com/

  6. joe says:

    30 year TIPS next month, I wonder what the breakeven inflation rate will be, and what the real yield will be? I probably will wait for February because I feel I may be able to get a higher real yield, but I could be wrong.

  7. tipswatch says:

    Joe, as of today you are looking at a 30-year breakeven rate of 2.515%, with the TIPS that will be reissued yielding 0.435% and the traditional 30-year Treasury yielding 2.95%. When it was first issued on Feb. 16, this TIPS yielded 0.770%. On that date, the 30-year Treasury was 3.14%, creating a breakeven rate of 2.37%.

  8. Pingback: Are TIPS expensive? A look back into recent history … | Treasury Inflation-Protected Securities

  9. Pingback: Next up: Reopening of a 10-year TIPS, auctioning on Nov. 21, 2012 | Treasury Inflation-Protected Securities

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