Up next: 5-year TIPS reissue will auction Dec. 19, 2013

The Treasury announced Thursday it is reopening CUSIP 912828UX6, creating a 4-year 4-month TIPS with a coupon rate of 0.125%. Because of upcoming holidays, the auction on Thursday, Dec. 19, will end earlier than usual: 11 a.m. for noncompetitive bids and 11:30 a.m. for competitive bids.

Scoping out the auction. Since this TIPS trades on the secondary market, we can get a pretty good idea of its likely yield at auction, currently about -0.44%, plus inflation. While that definitely is a modest return, it is much better than the -1.311% this same TIPS generated at its original auction on April 18, 2013.

(Side note: The Treasury’s Resource Center is showing a much higher yield for a full 5-year TIPS, -0.11%. I would take this as a strong hint that buyers at Thursday’s auction will get a better yield than -0.44%.)

The record low for any 5-year TIPS at auction was -1.496% on Dec. 20, 2012. This shows how much the Treasury market has changed in one year, with yield rising 105 basis points. While TIPS are being scorned by many investors, they certainly are a much better bargain today than they were a year ago.

The problem with a 4-year, 4-month TIPS is that it creates a small window for inflation to begin rising, and inflation protection is the reason you buy a Treasury Inflation-Protected Security. Right now, inflation has been running just 1% over the last 12 months. So buyers at the original auction in April – who paid $107.82 per $100 of value – are collecting a 0.125% coupon on $100 of value and getting paltry appreciation from inflation. For them, CUSIP 912828UX6 has been a horrible investment.

Yeah, I own it. I was a buyer of 912828UX6 at the August reopening, a small amount to fill a gap in my TIPS ladder. That auction generated a yield to maturity of  -0.127%, the highest yield for any 4- or 5-year TIPS issued in more than three years. Soon after, the Fed backed off on tapering and yields declined again.

You have alternatives. There are other great, super-safe, super accessible 5-year investments out there, and you should judge this TIPS against those. For example:

  • I Bonds are paying inflation plus .2%, which beats -0.44% by 64 basis points. You can sell an I Bond after five years with no penalty. No brainer, buy I Bonds up to the limit.
  • The 5-year Treasury is yielding 1.55%, up a dramatic 85 basis points from a year ago. This sets up an inflation breakeven point of 1.99%. If inflation continues to average less than 2%, a traditional Treasury will be the better investment.
  • Bank CDs are paying about 2% (and a whopping 3.04% at the Pentagon Federal Credit Union). But let’s say 2%. You’d do better with a bank CD if inflation averages less than 2.44% over the next five years.

I always have one good thing to say about 5-year TIPS: They mature in 5 years. Or in this case, 4 years, 4 months. It’s not a long-term commitment. Buyers at the Dec. 19 auction will still be paying up to get that 0.125% coupon rate, about $102 for $100 of value. That premium is at risk if inflation continues at extremely low rates, but I think that is unlikely.

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2 Responses to Up next: 5-year TIPS reissue will auction Dec. 19, 2013

  1. Keith R says:

    Hi,

    I am trying to build a ladder similar to what is sounds like you are doing. Choosing the vehicles has been more challenging than I initially expected. Last week I picked up a couple of CD’s in the secondary market:

    A 31 month CD yielding 1.06%

    A 58 month CD yielding 2.08%.

    However, earlier when I wanted a longer dated instrument I bought the last re-opening of the 10 year TIPS. I have thought about I-bonds, and I will probably buy more in January. Your idea of keeping them only for a few years is a good one.

  2. tipswatch says:

    Keith, finding any sort of yield is challenging but if you can find a 60-month CD at 3.04%, as the Pentagon Credit Union is offering, that is extremely attractive, especially in an tax-deferred account. On I Bonds, my philosophy is to buy and hold until you need the money. If you don’t need the money, keep holding them, because you can only buy $10,000 a year per person.

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