The U.S. Treasury will announce Thursday – just a formality – that on March 21 it will auction a reopening of CUSIP 912828UH1, a 10-year Treasury Inflation-Protected Security that was first auctioned on Jan. 24. This creates a 9-year, 10-month TIPS.

This TIPS has a coupon rate of 0.125%, but will end up auctioning with a yield to maturity well below that, probably around -0.526%, where it was trading on the secondary market on Monday. This also means that buyers at the March 21 auction will have to ‘pay up’ to get that 0.125% coupon rate, probably around $106.10 for every $100 of value.

TIPS yields are gently rising, but earning 0.5% less than inflation for 10 years won’t be attractive to a lot of small investors. Buyers who hold to maturity won’t be looking for income, they will be seeking: 1) Capital preservation with a super-safe, conservative investment, and 2) protection against a burst of inflation in the next 10 years. These buyers can ignore the secondary market and just hang on to maturity.

TIPS traders, though, will want to be cautious. Not long ago, every single TIPS ever issued was trading above its original value, as yields to maturity dropped to record low after record low. That trend has now broken, as shown in this chart of recent 10-year TIPS auctions:

If the March 21 auction goes off with a yield of -0.52%, it will mark the third consecutive 10-year TIPS auction with a higher (although still negative) yield. Buyers of CUSIP 912828UH1 back in January have already seen its market value decline by about 1%.

The question is always: Where are interest rates headed, and when? Wish I knew the answer.

Breakeven rate. The 10-year Treasury closed Monday at 2.07%, its highest rate for the year. If the TIPS reissue goes off at -0.52%, it sets the 10-year breakeven rate at 2.59%, meaning that buyers are betting that inflation will average higher than 2.59% over the next 10 years. A breakeven rate above 2.5% is considered very high. Keep in mind that inflation in 2012 was only 1.7%.