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The U.S. Treasury on Thursday released its formal announcement of a reissue of CUSIP 912810QV3, which will mature on February 15, 2042, making this a 29-year 4-month TIPS. It has a coupon rate of 0.75%, but will likely auction on Oct. 18 with a yield to maturity of about 0.38%.

That means buyers will have to pay money upfront to get this issue, since they will be getting interest payments about 0.37% higher than the auctioned yield. When you project that across 30 years, the cost will end up being about $110 to $111 per $100 of value.

Let’s say a buyer wanted $10,000 of this TIPS. It would cost that buyer about $11,100. In return, the buyer will receive taxable interest payments of 0.75% a year on a principal balance that will rise with the inflation rate for 30 years (and also be taxed each year for the increase, unless the TIPS is in a tax-deferred account).

Simple? Right. The only questions the buyer should ask are: 1) Will I be alive in 30 years? 2) Or if I sell before maturity, what will this TIPS be worth? While it may gain value in the short term, it is highly likely to lose value over the long term … my opinion. 3) Or, if I am committed to holding to maturity, can I live with a record-low interest rate and probable decline over time of this TIPS’ market value, even though I am holding to maturity?

The one appeal of this issue is that it does actually carry a positive yield over the inflation rate. Only TIPS maturing in 2040 and beyond still carry a positive yield, a remarkable plunge in rates that began in mid-2011 as the Fed began manipulating the Treasury market to force interest rates down. You can see that trend in the history of CUSIP 912810QV3.

First auction, Feb, 16, 2012: Yield to maturity of 0.770%

First reissue, June 21, 2012: Yield to maturity of 0.520%

Upcoming reissue, Oct. 18, 2012: Likely yield of about 0.38%

Who would buy this? Getting a yield above the inflation rate would look especially appealing to someone worried about very high future inflation and trying to protect against that inflation in coming years. This TIPS also could be appealing to big money managers (pension funds, international banks, etc.) that need the inflation protection.

But this issue will be very expensive (meaning the yield will be very low and the upfront cost very high). Here is the history of all 30-year TIPS auctions and reissues. Note that in June 2011 – 16 months ago – a 30-year TIPS reissue had a yield of 1.744%:

30-year breakeven rate. We look at the breakeven rate with each TIPS issue to see how it compares with a traditional Treasury. On Friday, the 30-year Treasury yield closed at 2.83%. Since this TIPS reissue will likely carry a yield of about 0.38%, the 30-year breakeven rate is currently 2.45%. So, if inflation runs more than 2.45% on average, the buyer of this TIPS will beat an investment in a 30-year Treasury.

That is a high breakeven rate, but I think a lot of people believe inflation is likely to run higher than 2.45% over the next 30 years. Blogger Michael Ashton produced this chart to show rolling 10-year inflation rates, compared with the then-current 10-year TIPS breakeven rate of 2.48%:

Ashton notes:

With the exception of the Great Depression, when the Fed tightened policy as money velocity declined in a manifest error, inflation has almost never been below the current level on a compounded 10-year basis. And it has never, with that singular exception, been very far below the current level. Ergo, inflation insurance is very cheap, even though 10-year breakevens are not far from all-time highs (since TIPS began, in 1997).

I advise reading this blog, which ends with a very funny (and brilliant) graphic on inflation-protection decisions. But keep in mind that Ashton is advising big money managers, not small investors. Inflation protection is ‘cheap’ for the big money group, but still rather expensive for the small investor looking for a super-safe investment.