Recapping the week: 30-year TIPS, mild inflation

I was on vacation last week in sunny Florida and had limited Internet access. But I wasn’t totally out of touch: I had satellite radio on my cheapo Hyundai rental car, and could listen to CNBC and Bloomberg Radio. So I spent Thursday morning, driving to Sarasota, listening for the January inflation number.

In a two-hour drive, I never heard the number. What I did hear was this: “Treasurys are weakening today on the January inflation number.” That perked my interest.  There’s a TIPS auction today! What was the inflation number? Never heard. What was happening to Treasurys? That I did hear: “The 10-year Treasury yield rose from 2.75% to 2.76%.” One basis point! That is not news, and inflation had nothing to do with it.

The inflation number, by the way, was 0.1% in January for the seasonally-adjusted Consumer Price Index for All Urban Consumers (CPI-U). Over the last 12 months, inflation was up a very mild 1.6%, still well below the Federal Reserve’s target of 2.0% and ‘danger level’ of 2.5%.

Read the full inflation report.

The non-seasonally adjusted CPI-U is used to determine the inflation adjustment to principal on TIPS and the future interest rate on I Bonds. In January, the non-seasonally adjusted number was 0.4%, but for the last 12 months the number remains at 1.6%.

Inflation is continuing at a very mild level. Gasoline prices fell 1.0% in January, but fuel oil prices increased 3.7% and natural gas was up 3.6%, the result of a wicked winter on the East coast.

Core inflation, which strips out food and energy, increased the same 0.1% in January and 1.6% for the last 12 months.

30-year TIPS auction

Of course, CNBC didn’t report on the TIPS auction. No mainstream media report on TIPS auctions, especially in the hour after the close. Thursday’s auction for a new 30-year TIPS, CUSIP 912810RF7, went off with a coupon rate of 1.375% and a yield to maturity of 1.495%. That result was slightly higher than expected; a week earlier I had noted a yield of 1.42% looked likely. But, no big surprises.

Read the TIPS auction announcement.

However, this was the highest yield for any 29- to 30-year TIPS at auction since June 2011, when a 29-year, 8-month TIPS went off at 1.744%. That was just before the beginning of a 24-month boom in Treasurys, which eventually deflated (a bit) in mid 2013.

Over the week, TIPS weakened as yields increased, but you can see from this chart that the Thursday auction, which closed at 1 p.m., was a rallying point for TIPS:

Week for TIPS

The TIP ETF is shown here in blue. It holds the full range of TIPS maturities. Over the last week, it lagged behind IEI (intermediate Treasurys) and AGG (the overall bond market). This means TIPS yields were rising faster than the overall bond market, resulting in a lower price.

When you see a chart like this, you can conclude that TIPS yields are increasing at a higher rate than the overall bond market, and that should mean a lower inflation breakeven rate. Thursday’s auction resulted in an inflation breakeven rate of 2.23%, in the ‘normal range’ but 5 basis points less than looked likely a week earlier. A lower breakeven rate means that TIPS are cheaper against a nominal 30-year Treasury.

When you are a buyer, cheaper is better.

Reaction to the auction.

The Wall Street Journal noted that demand for the 30-year TIPS was ‘tepid,’ possibly because inflation continues to be muted:

(P)aying for inflation protection is a hard sell these days. The latest CPI reported Thursday morning showed consumer prices gaining just 0.1% last month and 1.6% over the year. Core prices, which exclude volatile food and energy costs, also rose a mere 0.1%. These measures fall well short of the Federal Reserve’s 2% long-run inflation goal. …

The massive amount of bets that piled up against TIPS in 2013 actually helped the market bounce back in January. But bond traders now say that for TIPS to keep buyers around, the economy will have to start showing more substantial signs of inflation.


About Tipswatch

Author of blog, David Enna is a long-time journalist based in Charlotte, N.C. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website.
This entry was posted in Investing in TIPS. Bookmark the permalink.

6 Responses to Recapping the week: 30-year TIPS, mild inflation

  1. Pingback: Up next: 30-year TIPS reopens at auction Oct. 23, 2014 | Treasury Inflation-Protected Securities

  2. Pingback: Back from vacation; checking in on 30-year TIPS auction | Treasury Inflation-Protected Securities

  3. Ed says:

    I just did this

    Note how the half-decade plus, ending mid-1960s, was pretty much flat …
    a ghastly mis-prediction of the subsequent two decades,
    AND maybe intentionality-involved! I read a few times ‘have to pay
    for the war’!

    How often have we lately heard ‘worst since the Great Depression’.
    Savers have been already ‘quiet’ with near zero nominal rates, maybe
    they will be further identified as a soft spot to allow more

    Other histories seldom shown


  4. Ho, ho, ho. I still watch the investment programs on television occasionally, for entertainment only let me assure. TIPS? I savings bonds? They might just as well not exist for all the mention they receive, unless Zvi Bodie should happen to be the guest. I’m sure we can understand why that might be. Simiarly inflation is of little interest- until it gets out of hand and it is too late to position oneself.

    I’ve read quite a bit of the academic literature on TIPS and the theory is one should be better off, generally, buying the ten year note due to an implied risk premium to cover unexpected inflation.(25 basis points, .25%) As far as I can see this has been wrong more often then right over the years.

  5. Jimbo says:

    Once TIPS finally started having positive yields last year, I made my first foray into the wonderful world of TIPS. I’ve got a mix of TIPS with maturities ranging from 7 to 10 years. After the interest for the previous six months was posted in January, I did some rudimentary analysis of my purchases. Overall I had an annualized yield of 0.87%. That’s about half the inflation rate for 2013! This paltry gain was due to the timing of the purchases. If it wasn’t for the interest earned on some of them, it would have been even worse.

    Due to the vagaries of the inflation rate during the course of the year, I had a couple of real dogs. For example, on 9/5/2013 I purchased a TIPS with a maturity date of 1/14/2023 for $94.24. At that time, I felt pretty smug about things because the yield was .889785%. That
    smugness disappeared when I noticed that the bond value used to calculate the interest for the previous six months was $94.16. This was less than what I had paid for it nearly six months earlier. Let’s call this the “interest value”.

    Due to declining interest rates this year, by early February the actual market value of the bond had increased from the purchase price of $94.24 to $98.54. This was despite the fact that the inflation factor had continued to decrease during that period. By 2/10/14, the inflation factor
    had declined to 1.00970 and caused the “interest value” to go down to $94.05. This meant that if I sold the bond, I would realize a gain of 4.76% against the “interest value” and 4.57% against the actual purchase price. Annualized, the gain is over 9.0%!

    Based upon the above, I decided to unload this “loser”. There were a couple of reasons for this. First, I had never actually sold a TIPS bond. This gave me a chance to learn the mechanics of doing this thru my broker. Using the recently announced inflation factor for April 1,
    2014, my TIPS purchases would have recovered to an annualized yield of 1.37%. This just shows how quickly an uptick in inflation can reverse several months of negative inflation. By selling the “loser”, the annualized yield jumps to 1.64% as of April 1st.

    Even though I intended to hold this bond to maturity, the math certainly doesn’t warrant doing so. This TIPS bond is tracking junk bond yields. I’ve always been of the opinion to sell investments that are tracking way ahead of the norm before they inevitably revert back to the mean. That being said, that leaves you with the problem with what to do with the proceeds. However, even if I do absolutely nothing over the next six months, I’ll still going to yield 4.57% on that “loser” bond.

    That being said, my goal for this year is to attempt to buy more TIPS. The last TIPS that I bought was the new issue for 1/15/2024 when the 10 year Treasuries (TNX) were at 2.88%. Since then, the current interest rate environment has been more conducive to selling. For the last month, 10 year Treasuries (TNX) have been trading in a range between 2.58% and 2.77%. Based upon the last six months, when TNX has been over 2.80% it’s been a good time to
    buy. That hasn’t happened in over a month.

    Thanks again for the TIPS Watch website and it’s associated links.

    The information therein has been invaluable in evaluating the pros and cons of TIPS.


    • tipswatch says:

      Jimbo, that’s a lot of information! I’d say don’t overthink your investments in TIPS. I just buy them at auction and hold them to maturity, but that isn’t for everyone. I have never considered the secondary-market value of any TIPS, I just know I am getting x.xx% above inflation.

      TIPS are a very conservative investment, and aren’t (usually) going to get you big gains. Right now, with interest rates gradually rising (probably) and inflation muted, TIPS aren’t going to deliver anything amazing.

      So why buy them? The threat of future inflation. If you think there is no risk of future unexpected inflation, TIPS aren’t for you. If you think there is a risk, TIPS have a place in your portfolio.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s