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:
Since the beginning of 2014, the TIP ETF has outperformed IEI, an ETF that holds intermediate-term Treasuries. Both funds have a similar duration.
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.
Treasury Inflation-Protected Securities 
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Fred, great to see you found the site, and I hope you will keep reading. I learn a lot from my readers and I love hearing ideas. My philosophy on TIPS held to maturity is that they are never a ‘horrible’ investment, but some TIPS are better (like those ones back in 1999) than others (from mid-2011 to mid-2013). TIPS are starting to get interesting again.
Hi, just ran across your site for the first time. What an excellent job and what interesting comments. I have been a TIPS investor for years and have grown tired of hearing from friends and relatives how foolish I am because “everybody” knows it’s stocks, stocks, stocks. I was first alerted to TIPS by a letter to the Wall Street Journal by an economics professor myself (Fall of 1999). Best luck I ever had. Mel
Jimbo, thanks for reading.You are on target, and today’s purchase looks good, although I passed on this auction. Don’t forget about I Bonds, too, as a tax-deferred investment with inflation protection. The current yield, 0.2% plus inflation, won’t match today’s TIPS auction but the tax deferment and flexible maturity make it a good investment.
Ya, iBonds are decent. A positive yield of 0.2% is still better than the negative yield on the 5 year TIPS. A while back you popped for the 5 year TIPS auction that had a marginal negative yield. The way the yields were going-up back then, I figured that I would be able to pick-up that same 5 year TIPS on the secondary market with a positive yield in no time at all. I’m still waiting! I’ve been reserving some liquid assets for more purchases of TIPS. But, the yields have been going the wrong way since the end of last year. And, that cash is just sitting there getting practically zero interest while I hem and haw on the direction of the TIPS yields. This is despite the fact that the Fed is finally actually tapering. Even though we’re not talking about a lot of money sitting on the sidelines, its’ getting kind of annoying.
Since the yield for some of the TIPS have finally gone positive, I’ve been slowly purchasing small amounts at the original issues (and, on the secondary market). This one was no exception. Since yields have been trending down since the end of last year, I haven’t been too enthusiastic about increasing positions in TIPS. However, it’s a new year and I needed something with a maturity of 10 years. So, I bought at this auction to get something in the TIPS bond ladder for that maturity. I can’t say that I’m all that excited about what amounts to a 2.1% total yield (1.5% inflation plus the .625% coupon). But, at least its’ better than the coupon at the last re-issue of a 10 year note (.375%). Since my minimum financial goal is to preserve capital against unexpected inflation, this auction just barely fits the bill.
Jimbo
PS
Thanks again for the website and the various links therein. I got interested in TIPS after running across a couple of books that Zvie Bodie wrote a few years ago. Unfortunately, that was right about the time that the TIPS yields were negative out to practically eternity! I’ve developed a simple plan for investing in them. Basically, it consists of purchasing any maturity between 5 and 10 years that has a positive YTM, can be bought at a discount and has a higher yield than the previous purchase made for that specific maturity.
I bought at this auction and was pleasantly surprised by the 0.661% yield. Based on the noticeably lower yield for the 7/15/2023 which matures just 6 month’s earlier (0.52% on Bloomberg earlier today) I was expecting less. By the way, the $99.55 price you mention does not include the accrued interest of about $0.03 per $100. You can see this on the Treasury announcement you reference which shows ii as $0.27595 per $1,000.