The U.S. Treasury formally announced yesterday that on Nov. 21 it will reopen CUSIP 912828VM9, creating a 9-year 8-month Treasury Inflation-Protected Security.
This TIPS has an interesting history, because it was reissued on Sept. 19, the day after Ben Bernanke and the Federal Reserve backed off on any tapering the Fed’s bond-buying economic stimulus program. This ‘extension’ of QE3 gave the TIPS market a double boost, because 1) it meant the Fed would continue manipulating the Treasury markets, driving down yields and 2) it raised fears of future inflation based on runaway currency creation. I said at the time that TIPS buyers had been ‘Bernanked.’
So here is CUSIP 912828VM9’s history:
- First auctioned on July 18, 2013 with a coupon rate of of 0.375% and a yield to maturity of 0.384%, the highest in two years for any 9- to 10-year TIPS.
- Reissued on September 19, 2013 with a yield to maturity of 0.5%. But this yield was down substantially from the prevailing yield of 0.8% this TIPS was trading at before Bernanke blinked.
- It is now trading on the secondary market with a yield of 0.481%.
I consider the 10-year maturity the ‘sweet spot’ for TIPS purchases, because buyers benefit from the higher yield while also retaining a manageable maturity. By manageable I mean: I’ll be alive when this thing matures.
So looking at the big picture, this reissue is attractive. Buyers will get the TIPS at a discount, around $99 for $100.05 of value, calculating in the meager 0.5% inflation we’ve seen since July.
But I still hear a voice calling out: ‘This yield should be higher.’ The Fed’s efforts to keep longer-term interest rates low has had an effect: Just look at stock prices soaring while Treasury yields are holding at relatively low levels. Something has to give.
With the 10-year Treasury trading at 2.69% and this TIPS yielding around 0.48%, you are looking at an inflation breakeven rate of 2.21%, in the moderate zone but definitely not cheap. Back in July this number was 2.136%, indicating that TIPS have gotten more expensive relative to nominal Treasurys.
It has been a wild year for TIPS yields and I suspect we will see more of the same in 2014. The 10-year yield started 2013 at -0.62% and rose to 0.92% on Sept. 5. That is an amazing swing of 154 basis points. Since September, though, yields have fallen more than 40 basis points.
So the best deals for TIPS buyers happened to be in the late summer and early fall. But the boost in yields gave us a hint of what may be coming: ‘Normalized’ yields, returning to possibly 1.5% or even 2.0% on a 10-year TIPS.
Confession: I purchased 912828VM9 back in July in the heady days of positive yield! Waiting would have turned out better. But one thing is always true: Buying TIPS and holding them to maturity is never a bad investment.