Next up: New 10-year TIPS auctions Jan. 23, 2014

In the world of Treasury Inflation-Protected Securities, the 10-year issues hit the ‘sweet spot’ — providing a better yield than shorter-term TIPS and a lifespan that is reasonable for holding to maturity. They are ideal for adding another rung to a ladder of TIPS holdings, stretching out into retirement years.

On Jan. 23, the Treasury will auction a new 10-year TIPS, CUSIP 912828B25. Because this is a new issue, the coupon rate and yield will be determined at the auction, and they should be closely aligned, since this TIPS will go off with a positive yield.

What to expect. Right now, the Treasury’s Resource Center shows the 10-year TIPS yielding 0.61%, plus inflation, down about 19 basis points from where it closed 2013 and 31 basis points below the high yield of 2013. Bloomberg’s Current Yields shows a recent 10-year TIPS trading at 0.56%.

While TIPS and Treasurys have been getting tons of hate in the financial media recently, they’ve actually put on a decent rally so far in 2014, and that means lower yields. It also means that Thursday’s auction is a little less attractive.

But if Thursday’s auction results in a yield above 0.60%, it will be highest for any 9- to 10-year TIPS since July 2011, when a budgetary crisis in Congress roiled the markets and set the Federal Reserve on its bond-buying stimulus program, which continues today.

10-year TIPS auctions

Inflation breakeven rate. The nominal 10-year Treasury is trading today at 2.86%, setting up a breakeven rate of 2.26% for a 10-year TIPS yielding 0.60%. This isn’t cheap, especially at a time when inflation is running just 1.5% over the last year. But it isn’t expensive either. (The breakeven rate means that if inflation averages 2.26% over 10 years, the TIPS will outperform a traditional Treasury. In recent years, breakeven rates below 2.0% meant TIPS were ‘cheap’ and above 2.5% meant they were ‘expensive.’)

This chart pretty well shows the TIPS breakeven rate trading in the neutral zone:

TIPS breakeven rates

In conclusion. This TIPS auction should be attractive for anyone looking to add to TIPS holdings, especially after years of negative yields. It isn’t super attractive, though, and there will be two more opportunities to buy this TIPS at reopenings in March and May.

We may see higher yields by then, or not. I’ll wait this one out.

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