A new 5-year Treasury Inflation Protected Security auctioned today with a coupon rate of 0.125% and a yield to maturity of -1.311%, plus inflation. The resulting yield for CUSIP 912828UX6 was higher than expected, indicating weak demand. Experts had been predicting -1.384% just before the auction, and a similar TIPS that matures in July 2018 closed yesterday on the secondary market with a yield of -1.582%.
Today’s TIPS auction broke a two-year string of 4- or 5-year TIPS issues that set record low yields. Today’s yield of -1.311% is above the record low of -1.496% set in December 2012.
What it cost buyers. The Treasury’s announcement says buyers paid $107.82 per $100 of value for this TIPS, the cost of getting a coupon rate of 0.125% when the actual yield is -1.31%, a boost of 1.435% a year to ‘income.’ That’s still pretty pricey, especially in a time of softening inflation.
Reaction to the auction
On April 5 I posted a blog titled ‘Is buying a 5-year TIPS the most insane move ever?‘ and I guess a lot of people must have agreed. Here are some quotes from the Wall Street Journal report on the auction:
The U.S. Treasury’s sale of $18 billion in five-year inflation-index notes went poorly, drawing the smallest investor interest since October 2008, as inflationary fears faded away. …
The yield was almost seven basis points above the negative 1.380% yield right before the auction results were released, an indication of weak demand.
TIPS are often used by investors to hedge their exposure to commodity prices. “Given the falling commodity prices recently, I think there might be less hedging needs,” said Gennadiy Goldberg, a U.S. strategist with TD Securities. “I have never seen that much struggle for a 5-year TIPS auction.”
From the Bloomberg report:
“TIPS have had a rough time recently with the commodities selloff and renewed fears of deflation,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “People are again more concerned about deflation than they are about inflation. When that occurs, it will affect this market.”
Michael Ashton offers an interesting counter view in his E-pihany blog:
But the main reasons the auction failed were far simpler. Prime among these is that the 5-year TIPS have always had more problems being sold, because people who want inflation protection tend to primarily want long inflation protection. … (T)he 5y TIPS are mainly of interest to (a) indexers and (b) foreign central banks. As such, they are prone to occasional disasters …
Today’s auction might be a signal of a changing trend for TIPS, which have seen steadily declining yields since the Federal Reserve began its aggressive bond-buying programs in mid 2011.
But today certainly wasn’t an Armageddon for TIPS, with the TIP ETF closing at $120.98, down only 0.7% and well above its 52-week low of $118.43. If TIPS are heading into a time of rising yields (which I would love, since I want to be a net buyer of TIPS) there’s still a lot of room to run.
The breakeven rate
Today’s buyers could have purchased a 5-year nominal Treasury paying 0.71%, and so they need to see inflation average 2.02% over the next five years. Not a bad bet, but who is really buying 5-year Treasurys these days? I think a 5-year TIPS compares better with a 5-year insured bank CD, where you can get 1.7% at at least one bank, pushing the breakeven rate up to a more daunting 3.01%.