One last look: 10-year TIPS to be auctioned Jan. 24, 2013

Buyers have until noon Thursday to place an order for a new-issue, 10-year Treasury Inflation-Protected Security (CUSIP 912828UH1), so I thought I’d take another look at this issue, which I wrote about last week.

Yes or no? I’m solidly in the ‘no’ category. I predicted (guessed) last week that the yield to maturity would end up being about -0.69%, and that still looks about right. The yield on a 10-year TIPS that matures Jul 15, 2022 (the nearest thing to a 10-year on the market) closed today at -0.748%, slightly lower than last Wednesday’s close of -0.738%.

Negative yield? That’s right, buyers of this 10-year TIPS will be accepting about 0.7% less than the rate of inflation over 10 years. Headline inflation ran at 1.7% in 2012. So take your pick of possible yields for buyers of this issue, compared with competing products:

10-year average inflation rate Resulting TIPS yield 5-year CD I Bond
1.5% 0.8% 1.7% 1.5%
2.0% 1.3% 1.7% 2.0%
2.5% 1.8% 1.7% 2.5%
3.0% 2.3% 1.7% 3.0%
4.0% 3.3% 1.7% 4.0%
5.0% 4.3% 1.7% 5.0%
6.0% 5.3% 1.7% 6.0%

This 10-year TIPS cannot – ever – be better than a US Savings I Bond, which pays the rate of inflation, minus nothing. Plus, an I Bond has tax advantages, better deflation protection and can be sold after one year with little penalty and after 5 years with no penalty. Even a 5-year bank CD is more attractive, I say, because it can also be cashed in with some penalty (shop around for the best deal on that), or reinvested in 5 years when interest rates are likely to be higher.

Breakeven rate? OK,  forget bank CDs and I Bonds, how does this TIPS compare with a 10-year traditional Treasury? The 10-year Treasury closed today at 1.86%, meaning that the inflation breakeven rate for this TIPS will be about 2.56%. That’s rather high. As I pointed out a few weeks ago, a breakeven rate above 2.5% is relatively rare, and indicates that TIPS are getting expensive versus traditional Treasurys.

For the small investor, this TIPS is a loser. Leave it to the hedge funds, big money banks, national banks and even the Federal Reserve, which will be buying this, to be sure, lowering your yield at the same time.


About Tipswatch

Author of blog, David Enna is a long-time journalist based in Charlotte, N.C. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website.
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2 Responses to One last look: 10-year TIPS to be auctioned Jan. 24, 2013

  1. tipswatch says:

    Jimbo, that 3-year CD sounds like a buy. I lucked into a 5-year CD two years ago paying 3%, and the credit union allows me to add money to it monthly. Nice deal, bought it in both IRA and non-IRA accounts. Also agree on I Bonds; maxxing them is a good, very-safe strategy.

  2. Jimbo says:

    Every year I max-out in iBonds as a non-retirement fund inflation hedge. TIPS with a negative yield don’t do it for me. Your chart illustrates why everyone needs to be careful in the current interest rate and inflation environment. Every possible type of conservative bond investment is pathetic. Here’s what’s available on Fidelity’s website for 5-year bonds (not bond funds). Munis average around 1%. AAA corporates around 1%. Being really generous with rounding, Treasuries are 1%. Heck, Ally Bank provides nearly that yield in a money market account! Since the Fed is keeping rates low until around 2015, anything with a term greater than 3 years doesn’t sound too attractive. There’s a credit union currently offering 1.85% on a 3 year CD. With inflation currently running less than that, it actually doesn’t sound that bad.

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