The Treasury just announced the results of today’s reopening of CUSIP 912828UX6, a 4-year, 4-month TIPS that auctioned with a yield to maturity of -0.375%, plus inflation.
Because this TIPS carries a coupon rate of 0.125% – the lowest the Treasury allows on TIPS – buyers today will be paying up, about $103.22 for $101 of value, after accounting for about $1 of inflation-boosted principal since April.
The yield was slightly higher than the recent market on this TIPS on the secondary market, but yesterday’s tapering announcement from the Federal Reserve probably helped boost the number, at least a bit.
Today’s yield fell between the very low -1.311% of the original auction on April 18 and the more attractive -0.127% for the first reissue on Aug. 22. It’s interesting to note that the high-point of yield came during fears of tapering; now that tapering is official, the yield remains lower. Fear affects markets.
Inflation breakeven rate. With the 5-year nominal Treasury trading today at about 1.65%, this sets up an inflation breakeven rate of 2.025% for this TIPS, meaning that it will outperform a traditional Treasury if inflation averages more than 2.025% over the next five years. Inflation is currently running a very low 1.2% over the last 12 months.
Reaction to the auction. The TIP ETF is trading down very slightly today at $110.19, down 0.25%, and the market barely budged with the auction announcement.
From the Wall Street Journal report:
One positive reflection of the auction, however, was that end-investors bought nearly 60% of the total offering. That included 44.5% taken by indirect bidders and 14.3% taken by direct bidders, who often represent domestic fund interest.
Still, the market’s overall appetite for the new government debt was weighed down by the Fed’s decision to start trimming its asset purchases. In addition, overnight selling by money managers in Asia and Europe “started us on a negative tone to begin the trading session,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC.