Interest rates fluctuate, day by day, hour by hour. That fact makes predicting the future auction yield of a Treasury Inflation-Protected Security pretty difficult, even impossible. But you can guess, and sometimes you can get fairly close, if you watch indicators right up to the morning of the auction.
So in this post I will share some of the data sources I use to check on TIPS yields. And I will use Thursday’s reissue auction of a 5-year TIPS as an example.
The Treasury posts this each day, and you can track data going back many years. As of Friday, a ‘pure’ 5-year TIPS was yielding -0.19%, up 10 basis points from the day before. Since this is an estimate for a TIPS maturing in a full 5 years, it isn’t perfect for Thursday’s reissue, which has a term of 4 years, 8 months. But it should be close.
Where does the Treasury get this number? Good question. It explains in a footnote that the numbers are “calculated from composites of secondary market quotations obtained by the Federal Reserve Bank of New York.” However they do it, the numbers seem pretty accurate and often signal a future trend.
I use the Wall Street Journal’s data site, which also provides historical data, just use the little calendar icon in the top right corner of the chart. When a TIPS is reopening, like at Thursday’s auction, these numbers are especially helpful, because that TIPS is already trading on the secondary market. Here is last Friday’s close for the TIPS that matures April 2018 and will be reissued Thursday:
As you can see, the yield here, -0.315%, is much lower than the -0.19% projected by the Treasury. So we have a discrepancy, and that would make me think an auction today would produce a number higher than -0.315%. Another helpful item is the bid and asked price – notice the very wide spread. That also indicates a coming change in yield. It also gives you a rough estimate of what you will pay for this TIPS at auction — maybe about $10,132 for $10,000 of value. (Buyers back in April paid dearly, $10,782 for $10,000 of value to get a 0.125% coupon.)
This chart is helpful even for new issues, you can check a TIPS with the closest maturity date. But these numbers aren’t perfect as predictors.
This is the closest thing you can get to a ‘real-time’ quote, but it also isn’t perfect at predicting an auction price. Right now, at 10 a.m. Monday, it is showing a yield of -0.28% for the 5-year TIPS being auctioned Thursday. It shows a price of 101-29, very close to the bid price shown in the Wall Street Journal’s data. So it looks like the combination of Friday’s Treasury data and the secondary market data did accurately predict a rise in rates this morning.
Another number on this page worth watching is the nominal 10-year Treasury, which is currently trading at a yield of 2.86%. It closed at 2.84% on Friday, so this also shows weakness in the Treasury market.
I use Yahoo Finance for this. On the morning of the auction, after 9:30 am and before noon when the auction closes to non-competitive bids, check the TIP stock price. If it is down, you are likely to get a higher yield that you expected; if it is up, you are probably going to get a lower yield.
Today, at 10:05 a.m., it is trading at 110.14%, down 0.33%, and confirming weakness in the TIPS market. So we can expect yields to rise slightly if this trend continues.
It’s also fun to check the ETF after the auction announcement at 1 p.m. The TIP market often has a pretty strong reaction to auction results, positive or negative, and you can see the move right at 1 p.m. Here’s an example from July 18, 2013:
And still … it ain’t perfect. Predicting a TIPS yield at auction can make you humble. New issues, especially, are difficult to predict because new inventory is being added to the market. Another factor is Federal Reserve bond buying; you can’t be sure what influence that is having in the market. It’s hard to be a buyer competing with the Fed, and it can use its financial might to set a rate where it wants, when it wants.
But using these data sources can give you a pretty good idea where a TIPS yield is heading on the day of the auction.