10-year TIPS auctions at 2-year-high yield of 0.384%

Treasury logoThe U.S. Treasury just announced that its auction of a new 10-year Treasury Inflation-Protected Security resulted in a yield to maturity of 0.384%, the highest in two years for any 9- to 10-year TIPS.

This is CUSIP 912828VM9 and it will have a coupon rate of 0.375%.  That means buyers will pay very slightly less than par, but when accrued interest is added in the price will be nearly exactly $100 for $100 par. Here is the announcement.

This is the highest auction yield for any 9- to 10-year TIPS since July 2011, when a new issue 10-year TIPS went off with a yield of 0.639%. It is also the first positive yield for this term of TIPS since November 2011. (TIPS pay a base coupon rate, plus the principal grows at the rate of inflation until maturity.)

Although 10-year TIPS yields have backed off a recent high of about 0.64% on July 10, they’ve still seen a remarkable surge in 2013. Remember, a 10-year TIPS auctioned in January at -0.630% and was reissued in March at -0.602%. This is a gain of about 97 basis points in four months.

Inflation breakeven rate. The 10-year Treasury closed yesterday at 2.52%, so this TIPS has a breakeven rate of 2.136%. That means it will outperform a nominal Treasury if inflation averages more than 2.136% over the next 10 years. (As recently as March the breakeven rate was 2.54%.) Today’s number, while still relatively good, has been creeping up in the last two weeks. after dipping below 2.0%. This indicates stronger recent demand for TIPS than traditional Treasurys.

(And by the way, did you ever wonder how often inflation has averaged less than 2.2% over 10-year periods in the last 50 years? Check out this chart, looking at the columns on the right. Since 1961, the lowest-ever 10-year inflation average was 2.4%.)

Did I buy it? Yes. While I was disappointed with the recent swoon in yield, I wanted to lock in a 10-year TIPS with a positive yield. This was only my second TIPS purchase in two years.

Reaction to the auction. Bloomberg’s report says the yield was expected to be 0.399%, based on its survey of primary dealers. It quotes this negative viewpoint on TIPS from Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA:

“The TIPS market got ahead of itself and is still too rich and has overpriced demand. … “The economy hasn’t seen inflation pressure to justify TIPS strength.”

The article also quotes Michael Pond, head of global inflation-linked research at Barclays Plc, as saying today’s positive yield helped draw investors:

“TIPS got to very cheap levels relative to fundamentals and are now starting to offer some value. … The Fed has brought the dual back to the dual mandate by increasing communication around inflation which should bolster the idea that the Fed is serious about pushing inflation up.”

The Wall Street Journal‘s report notes the auction drew “robust demand from end-investors, with indirect bidders purchasing 57.7% of the notes, compared with an average of 49.6% for the past six sales.”

The TIPS market overall appeared pleased by the auction, which closed at 1 p.m. Here is the one-day chart for the TIP ETF, showing a sharp move upward after the auction:

july18

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4 Responses to 10-year TIPS auctions at 2-year-high yield of 0.384%

  1. E Royce says:

    I think what these commentators miss is that there is an insurance premium (embedded option) built into a TIP and the longer the maturity and the higher the level of interest rates (Black-Scholes) the greater the value. Hence, while it is possible that TIPS are overpriced at a point in time, it’s very hard to have an educated view on that apart from looking at the breakeven inflation rate. Otherwise what you’re really saying is that nominal Treasuries are not fairly priced.

    Taking this further, the value of this option to an individual who has no real knowledge of future expenditures or period he/she has to cover (we don’t know when we die) is enormous. And the cost of providing it by other means (apart from social security) is huge. Hence, the reason why so few insurance companies write inflation adjusted annuities.

  2. Pingback: Catching up on TIPS (after two weeks in Canada) | Treasury Inflation-Protected Securities

  3. Pingback: Federal Reserve delays tapering of economic stimulus | Treasury Inflation-Protected Securities

  4. Pingback: Up next: 10-year TIPS reissue will auction Nov. 21, 2013 | Treasury Inflation-Protected Securities

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