Up next: 30-year TIPS reissue will auction Thursday, Oct. 24

The U.S. Treasury will formally announce this Thursday, but it has already indicated it will reopen CUSIP 912810RA8 at auction on Oct. 24, creating a 29-year, 4-month Treasury Inflation-Protected Security.

Update: Here is the Treasury announcement

This will be an especially interesting auction because the announcement comes on the very day the Treasury predicts it will hit its debt ceiling. If this political crisis continues on for days or even a week beyond Oct. 17, it could roil Treasury, stock and bond markets. But I doubt that will happen.

This auction will also be interesting because buyers will be getting this TIPS at a huge discount from its original price on Feb. 21, when it auctioned with a coupon rate of 0.625%, and a yield to maturity of 0.639%. CUSIP 912810RA8 is now trading with a yield of about 1.4% and a price of about $81 for $100 of value. (The price buyers pay will also reflect about $1.70 in inflation adjustment since the February auction.)

A TIPS with a yield well above 1% (plus inflation) has been a rare thing recently. The only other auction with a yield above 1% was for this same TIPS in a June reissue, which netted a nice yield of 1.42%.

TIPS were under attack in June. On that auction date, the 30-year traditional Treasury was yielding 3.49% and it has since risen 25 basis points to 3.74%. The 30-year TIPS yield has actually declined a couple of basis points. That puts a pinch on the 30-year inflation breakeven rate, which currently stands at about 2.34%.

My theory is that a 30-year TIPS should pay at least 2% above inflation, which approximates the historical return for U.S. Treasurys. Looking back at historical data supports this, but there’s a big gap in the history because the Treasury halted 30-year TIPS auctions from 2002 to 2009, when TIPS yields were in a fairly stable pattern.

30-year TIPS auctionsAt this point, this auction will be very interesting to watch, maybe the most interesting of the year. If you are looking to give your TIPS ladder an interest-rate boost, and you can tolerate the ups and downs of a volatile 30-year issue, this will be one to consider.

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2 Responses to Up next: 30-year TIPS reissue will auction Thursday, Oct. 24

  1. Ed says:

    Dave, You wrote
    “My theory is that a 30-year TIPS should pay at least 2% above inflation, which approximates the historical return for U.S. Treasurys. Looking back at historical data supports this, …”

    History is all pre-crisis & crisis … Have you any thoughts of the future differing from the past? As I understand, financial repression after WW2 lasted several decades. (My question is all question, I have no idea.)

  2. tipswatch says:

    Ed, I agree that the TIPS 30-year yield has probably fallen permanently from the 4.0+% yields of 1999. But a yield of 2% above inflation is perfectly reasonable and actually likely in a year or so if they economy continues improving and inflation perks up a bit. But that is just a guess.

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