The Treasury today is reopening CUSIP 912828VM9, creating a 9-year 8-month Treasury Inflation-Protected Security. This TIPS trades on the secondary market, so we can get a pretty good idea of the likely yield, which was 0.587% (plus inflation) at the market close on Wednesday.
It’s trading around 0.62% right now, so the race is on to a higher yield when the auction closes at 1 p.m.
There’s been a big bump in yield in the last week, a good thing for buyers. Last week, when I previewed this auction, the TIPS was trading at 0.481%. The TIPS ETF has seen a fairly sharp two-day decline leading up to this auction:
I’m speculating, but a well-publicized negative opinion on TIPS from the investment firm BlackRock might have something to do with this jump in yields. Barrons picked this up in an article titled: ‘TIPS Are Still Expensive, Keep Avoiding Them‘. I can’t argue with the main points: That Treasurys are still overbought and TIPS are hurt by the current rate of inflation, which is extremely low. This was double-confirmed in Wednesday’s inflation report.
From the BlackRock report:
(W)e don’t believe investors need to increase holdings that are designed to protect against inflation, especially if those asset classes are expensive. In particular, we have a negative view toward Treasury Inflation-Protected Securities (TIPS). The absence of inflation is a key reason why TIPS have underperformed so much in 2013.
An update on inflation
Inflation in October fell 0.1 percent on a seasonally adjusted basis, and was just 1.0% over the last 12 months, the U.S. Bureau of Labor Statistics reported Wednesday.
The non-seasonally-adjusted CPI-U, which is used to adjust the principal balance of TIPS and set future inflation-adjusted interest rates on I Bonds, was even worse, falling 0.3% in October and rising only 1.0% over the last year.
For TIPS buyers, this is a double whammy. Buyers have been accepting yields near or below inflation over the last two years, and now inflation has turned into deflation. This stark reality ought to cast a pall over today’s auction.
On the other hand, the weak inflation report leaves the door open for continued economic stimulus from the Federal Reserve, a fact that in normal times would heighten inflation fears and boost the desirability of TIPS. That’s not likely to happen, today at least.
Conclusion. While buyers are getting a better-than-expected yield, this TIPS auction ought to have all the appeal of a moldy coffee mug. With inflation this low, TIPS buyers should be demanding a yield at least approaching 1.0% over inflation. Let’s see how it goes.