The U.S. Treasury just announced that its reissue of a 4-year, 8-month TIPS auctioned with a yield to maturity of -0.127%, the highest yield for any 4- or 5-year TIPS issued in more than three years. Read the announcement.
This is CUSIP 912828UX6. It carries a coupon interest rate of 0.125%, meaning that today’s buyers at auction had to ‘pay up’ to get that coupon rate, about $102.18 per $100 of value, a cost that includes about $1 of accrued inflation since April 15. This TIPS was originally issued in mid-April with a yield to maturity of -1.311% and a cost of $107.82 per $100 of value.
The auction demonstrates the incredible surge in Treasury yields since April, when Treasuries of nearly all types were trading with yields more than 100 basis points below where they stand today.
Just before the auction, this TIPS was trading in the secondary market with a yield of -0.20% or lower, so the -0.127% yield looks like a good deal for buyers, and indicates demand was probably lukewarm for this issue.
But the yield did remain barely negative, marking the 8th consecutive auction of a 4- to 5-year TIPS with a yield negative to inflation. (Holders of TIPS see their principal rise with inflation until maturity.) The last positive 5-year auction was a new issue in April 2010 with a yield of 0.550%.
Reaction to the auction. From a report by the Wall Street Journal‘s Min Zeng:
TIPS have sold off more sharply compared to regular Treasury bonds as the prospect of the Fed cutting back on easy-money stimulus reduce fears over inflation. Demand for inflation-hedging products has pulled back sharply this year …
So far this year, investors have yanked $16.5 billion out of TIPS bond funds and ETFs, already surpassing the redemption of $2.9 billion in 2006, the biggest calendar-year outflow since Lipper started tracked the data in 2002.
“It is a terrible environment as rising yields and low inflation are bad combination for TIPS,” said Jeff Tjornehoj, head of Lipper Americas Research.
Inflation breakeven rate. The 5-year nominal Treasury is currently trading at 1.70%, creating an inflation breakeven point for this TIPS of 1.827%. That means if inflation averages more than 1.8% over the next five years, this TIPS will outperform the nominal Treasury.
Treasury Inflation-Protected Securities 
Pingback: What would ‘normal’ TIPS yields look like? | Treasury Inflation-Protected Securities
Pingback: Recapping 2013: The year in TIPS | Treasury Inflation-Protected Securities
Since it was a negative yield, I passed on this one. I was planning on picking some of these up on the secondary market once the yield goes positive. By the end of the day the WSJ showed the yield to be -.168. But today, the yield has been backsliding. At around 1:45 PM Eastern time Vanguard shows an ask price of -.269. So, it looks like I’ll be waiting a while before this issue finally goes positive. Yesterday, the 10 year TIPS closed at positive .769 (which I think is a new high for the year). Today, the yield has slipped to positive .666. The good news is, at least there’s finally something worth purchasing. The bad news is, if you have to sell anything your going to get crushed.
Jimbo, this 5-day chart of the TIPS ETF says it all, with the low point hitting at the exact time the auction closed on Thursday. This often seems to happen in the week of an auction, either positive or negative.
I was a buyer this time, I wasn’t expecting that high a yield but 10 basis points over 5 years isn’t going to make much a difference, really.
I bought the auctioned TIPS as inflation insurance. I’ll express in terms of purchasing power. At the total cost of 0.59% of my investment over the whole 4yr8mo, the other 99.41% of my investment is guaranteed to have unchanged purchasing power at the end of the 4yr8mo. Pretty cheap insurance, seems to me. And don’t forget http://showrealhist.com/yTRIAL.html
Thanks Bob, I made an adjustment to that sentence to note the accrued inflation. When I wrote the first post, the announcement hadn’t been released yet.
Saying “$102.18 per $100 of value” overstates the cost. As of 8/30/2013 these TIPS have an index ratio of 1.00998 meaning the CPI has increased about 1% since their “Dated Date” of 4/15/2013. It would be more correct, therefore, to say “$101.17 per $100 of value” or “$102.18 per $101.17” of value. (These figures are all shown on the Treasury announcement.)