The U.S. Treasury will announce tomorrow that it will be auctioning a new-issue 10-year Treasury Inflation-Protected Security on July 18. This will be CUSIP 912828VM9. The coupon rate and yield to maturity will be set at auction.
Update: Here is the Treasury’s auction announcement.
Yield = positive, a rare thing. Right now, it looks like this 10-year TIPS will auction with a yield to maturity of 0.59% (but a lot can change in a week). This will be the first positive yield for a 10-year TIPS since November 2011 and the highest yield in two years. Here’s a chart showing the steep decline in yields after mid-2011; and how the trend began reserving after March 2013:
Here is another chart that shows just how quickly TIPS yields have risen from their ultra-low levels of the last two years:
This chart also shows there’s plenty of room for TIPS yields to continue rising to reach more ‘normal’ levels, say about 1.5% on a 10-year TIPS. My prediction is that 10-year TIPS yields will climb (or fall) at about the pace of a 10-year nominal Treasury. The bond market is pricing in future ‘tapering’ of bond-buying by the Federal Reserve. The Fed hasn’t started tapering and we don’t know if it will, or when.
If the economy slumps, the Fed won’t taper and the bond-buying will continue, and TIPS yields will head back to zero or below. If the economy improves, yields are going to rise.
Inflation breakeven rate. The 10-year nominal Treasury closed Tuesday at 2.65% and the 10-year TIPS was yielding 0.59%, creating an inflation breakeven rate of 2.06%. This means if inflation averages more than 2.06% in the next 10 years, the TIPS will be a better investment than a 10-year Treasury. Although the breakeven rate has risen from the 1.95% range a few days ago, this is still an attractive rate. (I usually say that TIPS are ‘cheap’ when the breakeven rate hits 2%, and this is very close.)
Here is a chart showing the breakeven rate over the last 10 years; while the rate can fluctuate wildly at times of deflation, it usually remains above 2%:
TIPS vs. I Bonds. Ten-year TIPS traditionally have paid a 1% yield premium to I Bonds, because of the tax advantages and flexibility of US Savings I Bonds. TIPS still haven’t reached that level, mainly because I Bonds cannot earn a negative yield. So I think I Bonds are still a better investment in mid-2013. That means: First, buy I Bonds up to the limit ($10,000 per person per year), then buy TIPS.
Strategy? I probably will be a buyer at the July 18 auction, because I have a 10-year TIPS maturing this month. This will be buy-and-hold-to-maturity investment, so even if yields rise in the future, the investment is ultra-low risk. This will be a rollover, not a bet-the-house investment.
I suspect the trend has turned on TIPS and we will see gradually increasing yields. If you want to gamble on that, this TIPS will be reissued in September (when the Fed in theory could begin tapering). You could sit on the sidelines and see what happens.
Treasury Inflation-Protected Securities 
This will be a pretty auction for those who want a shorter term TIPS, getting a real yield of 0.6%. Being younger I would want a real yield of 2% at least, but the closest I can get is 1.4% with the 30 year TIP on the secondary market. Inflation has been about 1.2% since February when I got the 30 year TIP at auction with the real yield around .625%, but I plan to keep to maturity. So if there is no more inflation this year, I will end up with 1.8% which is better than most 10 year cds. Sure if I sold today there is a loss, but I want to keep to maturity.
So basically this 10 year TIPS is a great deal compared to the 30 year TIPS in February because you only have to keep for 10 years instead of 30 with pretty similar real yields.
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Lee it’s a really good question because in auctions in the last couple of years buyers have been paying up dramatically because the yield ended up being negative and the coupon rate ended up being 0.125%, the lowest it can go. That won’t happen Thursday. The coupon rate will be set at auction and will probably be 0.5% or 0.625%. The yield will be a number close to whatever the coupon rate is, so the price you pay will be close to amount of TIPS you are buying. So you might end up paying slightly more or less than $100 of value. Because this is a new issue with a positive yield, the price should be $99 to $101, maybe even $99.50 to $100.50.
I have a fixed dollar amount that I want to commit to this auction. But from what I see, the cost per $100 at settlement can vary wildly from $99 to $109. I don’t see the logic here. How do you figure how much you can safely commit to buy (I am using Fidelity, as this is an IRA) and not risk a commitment that exceeds available funds, thus killing the deal? Do I have to use a worst case of $109 to assure the trade goes through? No pun intended, but any tips would be appreciated.
Tom, the yield won’t be wildly different, but it certainly can be hard to predict with a lot of certainty. I learned that a long time ago. The Treasury makes an attempt to estimate the closing ‘real yield’ each day, and you can find that here: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield
Since this TIPS is a new issue, there is no direct secondary market. Its yield can fluctuate a little from the norm because it is new inventory being added to market. How much demand is there for the inventory? A lot? Or a little?
We have had wild news events on the day of or before auctions (such as a credit crunch somewhere in Europe, or an unexpected inflation report) that can cause a swing on the day of the auction. The next CPI report comes out Tuesday, two days before the auction. That will have some influence on the yield.
If you are buying at TreasuryDirect, you have until noon Thursday to place the order. I usually place my order a day in advance.
How much risk is there that yield determined at the auction will be different from the secondary market? Or, how different does previous auction history suggest it could be? I am thinking of making my first TIPS buy next week.
Jimbo, I agree with about every point. I also just started buying TIPS after a two-year hiatus. It was worth the wait. And I am willing to bet on inflation of higher than 2.0% over the next 10 years. It could be much higher, once the effects of worldwide monetary easing really lock in. It is at least a danger, and worth buying protection, for a part of your portfolio.
Now that the medium term TIPS have wandered into positive territory, I’ve started buying them. Since my financial goal is to maintain a zero-sum game against inflation. I just bought a secondary market TIPS with a remaining term of 7 years. The yield to maturity was a whopping .036445! That’s about as close to a zero-sum game as you’re going to get. Basically, the only thing that I’m going to get is the inflation protection. The unadjusted CPI-U for the last 12 months was 1.4%. The best CD rate for a 7 year term that I could find was 2.1%. The closest thing to a 7 year regular Treasury that I could find had a 2.053 yield to maturity. So, I’m betting that the inflation is going to average greater than 2.0% over the next 7 years. As far as the upcoming 10 year auction goes, I’m leaning towards passing on this one. Mostly, this is because with the current crazy global economic conditions, I don’t like terms that are much past 5 years. And, then there is the fact that 10 years out is approximately my remaining shelf life. Thanks for all of the charts that
you generate. And, for the links to Bloomberg and the Wall Street Journal (for the current TIPS rates). Great stuff.