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.
1. Check the Treasury’s Daily Real Yield Curve rate
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.
2. Check the secondary market for TIPS
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.
3. Check Bloomberg’s current yields for U.S. government bonds
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.
4. Check the current price of the TIP ETF
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.
Bob, thank you! Great information. Who knew? You did, and I appreciate your comment. Keep reading, and please share your knowledge.
The WSJ quotes TIPS prices in 32nds of a point. So bid 101.32 & ask 102.02 really mean 101+32/32 and 102+2/32. (I don’t know why they show 101.32 instead of the equivalent 102.00 since the latter is more natural.)
Since the yields backtracked a little today, it definitely looks like this week’s 5 year auction is going to have a negative YTM. So, I think that I’ll pass on this one. Hopefully, in the not so distant future, I’ll be able to pick this 5 year issue on the secondary market with a positive YTM. I bought the 10 year TIPS new issue in July with a .384 YTM. Yesterday, I purchased more of the same with a .704 YTM. Originally, I thought that I went a little too light into the new issue. But, with the yields trending upwards, it’s actually worked-out better buying on the secondary market. I’m committed to buying more TIPS with what I currently have sitting on the sidelines. The big question of late has been how much to purchase and when. Basically, I just start buying small quantities of various maturities if they exceed the previous high YTM for the year. When the yield starts to decrease, I back-off. The last few months have seen a relatively large positive movement in the yield. I was really caught off guard by this. I had been lulled to sleep by the negative yields of the past couple of years. The way things were going, it looked like there wasn’t going to be any movement for at least a couple more years. Now, I’m checking those yields on a daily basis!
Yes, the yield on TIPS has risen more than 100 basis points since May 1. For example, the 5-year TIPS was yielding -1.43% on April 26 and now is yielding -0.21%. That is 120 basis points, amazing. Could we see another 100-point rise? Definitely, but I doubt it will happen quickly. Your strategy — timing small purchases as yields rise — is sound.
I offer these as thoughts, NO associated probabilities.
Such remarks by a POTUS are unprecedented, or nearly so:
Bubbles are best seen if prices are inflation adjusted, remember
So …, inflation protection sounds better than some such rides …?
Correct, a non-competitive bid, like the one you place through TreasuryDirect, has to be made by noon, but a competitive bid, which must be placed through a bank or broker, can be placed until 1 p.m.
Ed, I have noticed that Reuters issues a survey of major broker-dealers that is highly accurate, but that seems to be released after noon, when the auction closes to non-competitive bidders. So it isn’t much use to the regular-guy investor.
Just thought of this, I think it is correct, but I have NOT checked all details. A competitive bid, at an absurdly low yield & therefore sure to be accepted like all non-competitive bids, has a deadline of 1PM for submission.
Very excellent, thorough and timely, thanks much. One yield that is ‘out there’, but I don’t know how to get it, is the When-Issued Yield, maybe the best estimate … Because it is the current yield of actual, big-money trading of the bond yet to be auctioned, for settlement on the day the auctioned bond will be issued