Next up: 5-year TIPS reissue auctioning Dec. 20, 2012

The Treasury on Thursday will announce its last 2012 auction of a Treasury Inflation-Protected Security, mostly likely a reopening of CUSIP 912828SQ4 which matures on April 15, 2017.

UPDATE 12/13/12: The Treasury confirmed today that the auction is a reissue of CUSIP 912828SQ4 … read the announcement.

This creates a 4-year, 4-month TIPS – the shortest maturity TIPS you can buy directly from the Treasury. It carries a coupon rate of 0.125%, but the yield to maturity is likely to around -1.551%, where this issue was trading Friday on the secondary market. Buyers will be paying about a 7% premium upfront to get that 0.125% coupon rate.

Attractive? No. This TIPS has only one thing going for it – it matures in 4 years, 4 months. Otherwise, it guarantees a return of 1.55% below inflation during a time of relatively mild inflation. The return is likely to end up being about 1%. You can do better with a 5-year bank CD — some are offering 1.8% today on a 5-year CD.

If you are a big hedge fund looking to park money safely, or a foreign national bank stashing reserves, this TIPS makes sense. Otherwise, there is one very important alternative you should consider:I Bonds at glance

  • Have you made your I Bond purchase for 2012? If not, this is an investment you need to make before Dec. 31. An I Bond will pay the rate of inflation over the next five years, when you can sell it without penalty. This investment is a no-brainer versus a 5-year TIPS — inflation rate versus inflation rate minus 1.55%.
  • I Bonds carry a base interest rate, which is currently zero, plus an inflation-adjustment interest rate that changes every May and November. The current rate through April 30 is 1.76%. An I Bond you buy before Dec. 31 will pay an annual rate of 1.76% over the next six months.
  • There are also key tax advantages to I Bonds, since the federal income tax is deferred until the bond is sold. You can hold an I Bond 30 years without paying any tax. With a TIPS, all income is taxable in the current year, even the inflation adjustment to principal, which you don’t receive until the TIPS matures.
  • Why is Dec. 31 important? The problem with I Bonds is each person is limited to a $10,000 purchase each calendar year (plus an option to get paper I Bonds instead of an income tax refund.) If you buy $10,000 today, you can buy another $10,000 in January.

I suspect that most people reading this blog have already bought I Bonds up to the limit in 2012. But if you haven’t, I suggest going to TreasuryDirect.gov to start the process today. There is no fee, no commission. Your money is 100% invested with the U.S. government.

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This entry was posted in I Bond, Investing in TIPS, Savings Bond. Bookmark the permalink.

3 Responses to Next up: 5-year TIPS reissue auctioning Dec. 20, 2012

  1. Ed says:

    David, I’m thinking of buying I-bonds this week. Any update to your figuring …? Thanks.

    • tipswatch says:

      Ed, I have already bought my 2013 allocation of I Bonds, so it sounds like we’re on the same page. If you have TIPS maturing, especially, it makes sense to replace them with I Bonds up to the limit – $10,000 per person per year.

  2. Pingback: Can a TIPS investment go bad? Yes, it can. An ugly example. | Treasury Inflation-Protected Securities

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