The Treasury just announced that its reissue of CUSIP 912828UH1 – creating a 9-year, 10-month TIPS – auctioned with a yield to maturity of -0.602%.
That means buyers of this Treasury Inflation-Protected Security are accepting 0.602% less than the rate of inflation over the next 10 years. This TIPS has a coupon rate of 0.125%, the lowest possible. Buyers will therefore ‘pay up’ to earn the auctioned yield, about $107.06 per $100 of value.
Today’s rate, though, is slightly higher than the -0.630% yield generated at auction when this TIPS was born in January.
Read the Treasury’s auction results summary.
Today’s auction continued a trend of TIPS offerings with yields rising above record lows. The record low yield for any 9- or 10-year TIPS offered at auction is -0.750%, set last September. But as recently as 10 days ago, a -0.5% yield looked possible for today’s auction. That trend turned when economic turmoil in Cyrpus gave Treasury markets a boost.
The breakeven rate. The 10-year Treasury is currently trading at 1.94%, down from 2.06% as recently as March 7. That sets the 10-year breakeven rate for today’s TIPS at 2.54% – meaning that buyers are betting that inflation will average 2.54% over the next 10 years.
Any number over 2.5% is historically high for the breakeven rate. Inflation has been running at 2.0% over the last 12 months.
Reaction to the auction. The Wall Street Journal’s Cynthia Lin called demand for this auction ‘decent,’ despite the negative yield.
Despite the negative yield and little sign of inflation in the U.S. economy, some investors are still willing to pay up for inflation protection because of the Federal Reserve’s ongoing easy monetary policy. The central bank aims to induce inflation by buying bonds, currently set at $85 billion a month. The Fed on Wednesday affirmed this policy. …
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