Next up: Reopening of a 10-year TIPS, auctioning on Nov. 21, 2012

Treasury announcementThe U.S. Treasury announced today it will reissue a 10-year Treasury Inflation-Protected Security, CUSIP 912828TE0, effectively creating a 9-year 8-month TIPS.

Read the announcement.

What we know: This TIPS has a coupon rate of 0.125%, the lowest the Treasury offers on a TIPS. It also has a record-setting history in the world of 10-year TIPS:

First auction: On July 21, 2012, with a record-low yield to maturity of -0.637%.

First reissue: On Sept. 20, 1212, with a record-low yield of -0.75%

And now we have the second reissue coming Nov. 21, and we can expect another record low yield. Since this security trades on the open market, we can check its current price.

At this point, a week away from the auction, it looks like the yield to maturity will set another record low, dipping to about -0.83%. That means buyers are willing to accept 0.83% less than the rate of inflation over the next 10 years. It also means this TIPS is pretty darn pricey.

Not too long ago (who remembers January 2011?) a 10-year TIPS auctioned with a yield of 1.17%. It’s been a long, steady decline since then, mostly caused by Federal Reserve manipulation of the Treasury market (QEs), but also fear of economic collapse in Europe and lingering fears of inflation in the United States (still dormant today.)

Here are recent 10-year TIPS auctions for some historical perspective:

10-year TIPS auctions

Because buyers at next Thursday’s auction will be getting a coupon yield that is a wild 0.956% above the actual yield to maturity, they will be paying big money for this issue — somewhere around $109 for every $100 of value. Ouch. You really have to fear future inflation to pay that price, in my opinion.

The breakeven rate. The national election Nov. 6 has set off fears of a financial crisis ahead (like we didn’t know the fiscal cliff was looming a month ago?). This has socked the U.S. stock market and strengthened U.S. Treasuries.

The yield on a traditional 10-year Treasury closed today at 1.58%, down from 1.78% on Election Day. When traditional Treasury rates fall, TIPS yields almost always follow. A buyer can look at the ‘breakeven inflation rate’ to see which is the better ‘bargain.’

Today, that 10-year breakeven rate is a rather high 2.41%. That means a buyer of this TIPS needs inflation to run at 2.41% over the next 10 years to beat an investment in a traditional Treasury. (The inflation rate over the last 12 months was 2.2%, by the way.)

This reissue will continue a nearly 18-month trend of declining TIPS yields. Until that trend breaks, TIPS are not an attractive investment for a small investor.

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