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.
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:
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.