The Treasury just announced that today’s auction of a 9-year, 8-month Treasury Inflation-Protected Security resulted in a yield of -0.225%, the highest yield on a 10-year TIPS in more than a year. This was a bit better than the -0.244% experts were predicting just before the auction.

Here is the Treasury announcement.

CUSIP 912828UH1, with a coupon yield of 0.125%, was first auctioned in January with a yield to maturity of -0.630% and then reissued in March with a yield of -0.602%.

The rise in yield means that buyers at today’s auction will be paying a much lower price for that 0.125% coupon, about $104.27 per $100 of value. That is down from $107.50 from the January auction.

The principal balance of TIPS is adjusted to reflect inflation, so a buyer at today’s auction is accepting a return of 0.225% less than inflation each year over 10 years.

TIPS yields, which have been as low as -0.750% for a 10-year issue, have been rising in the last month because of a trend of weakening inflation, plus a fear among investors that the Federal Reserve soon could halt or slow its bond-buying stimulus.

10-year breakeven rate

At midday today the 10-year Treasury was trading with a yield of 2.03%, making the 10-year inflation breakeven rate 2.255%. This is substantially lower than the lofty 2.54% resulting from the March reissue of this same TIPS. That means TIPS have become cheaper relative to traditional Treasuries.

Analysis of the auction

Carolyn Cui of the Wall Street Journal writes:

With real yield rising to the highest in more than a year, the inflation-adjusted Treasurys attracted decent demand from investment funds and foreign investors. …

One negative reflection of the auction, however, was that it had a light ratio of bidders to the amount of debt sold, at 2.52 times compared with the average of 2.66 times for 10-year TIPS during the past six auctions. As a result, the auction stopped at -0.225%, higher than the -0.246% for similar notes already in circulation before the auction.

Daniel Kruger of Bloomberg writes:

“Investors felt like this was meeting their support levels where they felt it was time to jump back in,” said Michael Lorizio, senior trader at Manulife Asset Management in Boston. “Digging deeper into the data really does spell this as a really solid auction.”