The U.S. Treasury just announced that its auction of a new 10-year Treasury Inflation-Protected Security, CUSIP 912828B25, resulted in a coupon rate of 0.625% and a yield to maturity of 0.661%, plus inflation.
This was the highest yield for any 9- or 10-year TIPS at auction since May 2011, when a 9-year, 8-month reopening auctioned with a yield of 0.89%, and it marks the 8th consecutive auction for this term with a higher yield.
Since the yield is higher than the coupon rate, today’s buyers are getting this TIPS at a slight discount, about $99.55 per $100 of value, before accrued interest is added in.
Buyers should be pleased with the 0.661% yield, on a day when Treasury prices are rising and yields are dropping, possibly because of a weak jobs report. A week ago, this TIPS auction looked likely to go off at 0.61%, and yields slipped a bit in recent days.
The TIP ETF, which holds TIPS in a wide range of maturities, is trading up today about 0.4%, joining the overall Treasury upsurge, and this price has held steady since the auction closed at 1 p.m., indicating today’s result went at expected.
Inflation breakeven rate. With the nominal 10-year Treasury currently trading at 2.78%, this new 10-year TIPS has an inflation breakeven rate of 2.12%, a fairly attractive number. This means that if inflation averages more than 2.12% over the next 10 years, this TIPS will outperform a traditional Treasury.
This also indicates that TIPS – a much-unloved investment since mid 2013, are now outperforming traditional Treasuries, as you can see in this chart comparing the TIP ETF with IEI, an ETF holding intermediate Treasurys:
Reaction to the auction
From Carolyn Cui of the Wall Street Journal:
Demand was evidently weak among all bidding groups, as buyers submitted $2.31 in bids for every dollar of debt being auctioned off, the lowest bid-to-cover ratio seen since April 2009. As a result, the Treasury was forced to pay a high interest rate for the new 10-year TIPS of 0.661%, the highest yield since a 0.887% rate was offered in May of 2011. …
“We believe…the strong real yield performance pre-auction kept some buyers on the sidelines,” wrote analysts with Nomura Securities.