The U.S. Treasury just announced that its 29-year, 8-month reissue of a Treasury Inflation-Protected Security auctioned with a yield of 1.42%, capping a spectacular run-up in yield in recent days. Read the announcement.

This TIPS, CUSIP 912810RA8, was trading at 1.236% yesterday and 0.750% one month ago, on May 20. That’s a powerful increase of 67 basis points in four weeks.

The yield of 1.42% is the highest on any TIPS of any maturity in the last two years – since June 2011 – just before TIPS yields began a long, steady decline because of the Fed’s bond-buying and fears of resulting inflation.

Because this TIPS was first auctioned in February with a coupon rate of 0.625%, buyers at today’s auction are getting a giant discount, paying about $81.75 for $100 of value. It’s almost like a zero-coupon bond, with a lot of the interest being discounted up-front. The market value of this TIPS has fallen 17.9% since it was first auctioned four months ago.

The overall TIPS market is having another miserable day, with the TIP ETF currently trading at $111.61, down more than 1% today. This auction certainly won’t help.

I have been predicting that the TIP ETF could fall to about $111 as overall interest rates increased. But this decline has been dramatic, and probably indicates rough times ahead.

Reaction to the auction, from Carolyn Cui of the Wall Street Journal:

Though the TIPS were offered at 1.420%, the highest yield for similar bonds in two years, the auction didn’t draw much interest from investors. The interest rate was higher than the 1.390% for similar bonds already in circulation before the auction, another sign of poor reception. …

The poor auction results reflected the plummeting inflation expectations so far this year, driving the 30-year inflation-adjusted yield up from 0.404% to 1.400%.

Also, this from Cordell Eddings & Susanne Walker of Bloomberg:

“The TIPS auction was pretty awful given the concession that we had,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 21 primary dealers that are obligated to bid at U.S. debt auctions. “There just isn’t any inflation pressure, and the markets aren’t buying that there will be any inflation.”