Later today, the U.S. Treasury will formally announce it will reopen CUSIP 912828B25, a 10-year Treasury Inflation-Protected Security, in an auction on Thursday, March 20. This TIPS originally auctioned Jan. 23, 2014, with a coupon rate of 0.625% and a yield to maturity of 0.661%, plus inflation.
Update: Here’s the announcement.
So, what can we expect from this 9-year, 10-month TIPS? If the auction were today, the yield to maturity might be around 0.55%, a drop of 7 basis points since the January auction. That means buyers would have to pay up a little to snag this TIPS, around $100.30 for $100 of value.
But a lot can happen in a week. Here are some data sources to check before the auction:
- The Treasury’s Daily Real Yield Curve Rates, which right now are indicating a yield of 0.54% for a 10-year TIPS.
- Bloomberg’s Current Yields, which reflects current trading but can be a little misleading. At this moment, it shows CUSIP 912828B25 trading at 0.55%.
- The Wall Street Journal’s closing price list for TIPS, which shows that the TIPS maturing 2024 Jan 15 closed Wednesday at 0.523%.
- I’d also recommend using the Treasury’s Yield Curve site to track the yield of the nominal 10-year Treasury, which is currently at 2.73%. The TIPS yield is likely to rise and fall with that number over the next week.
If next Thursday’s auction yield fails to exceed 0.661%, it will break a string of eight consecutive 9- or 10-year TIPS auctions that have resulted in a higher yield. Here is a history of 10-year TIPS auctions going back to 2009:
Although bond yields were expected to rise in 2014, the opposite has happened, thanks to some shakiness in the stock market and worries over Russia’s incursion into Crimea. All Treasurys, including TIPS, benefit with the ‘flight to safety’ that inevitably follows stock-market hiccups. The TIP ETF is up almost 2% since Jan. 1, even as inflation remains tame.
It’s also significant that TIPS have been out-performing Treasuries of similar terms. Take a look at this year-to-date chart for the TIP ETF versus IEI, an ETF holding intermediate-term Treasuries and having a similar duration:
When you see this happen, it means the inflation breakeven rate is climbing, and TIPS are getting more expensive versus traditional Treasuries.
If next Thursday’s auction goes off at 0.55%, it would create an inflation breakeven rate of 2.18%, versus 2.12% when the TIPS first auctioned in January. Still on the relatively cheap side, but keep an eye on the 10-year Treasury over the next week.
Today, the TIPS yields are sinking like a rock. Both the bid/ask yields have sunk under .500. Unless things turn around next week, I’ll probably pass on the auction. I bought into the one in January and don’t feel like purchasing anything below the .661 YTM of the initial offering.
PS to Richard,
A good introduction to TIPS can be had at the following website:
I just started buying TIPS last year. So, I’m hardly a world’s authority on the topic.
However, I’ve learned a few things since I placed my first orders.
If you purchase TIPS at an auction, you’re stuck with whatever the price is set at that auction. You’re not allowed to place a limit price on the order.
That’s why the TIPSWATCH guy spends a lot of time looking at the prevailing YTM for bonds with equivalent maturities on the secondary market prior to an auction.
If you buy the re-issue coming-up next week and the prevailing YTM for 10 year TIPS on the secondary market is less than .661%, you’ll be paying over par for them.
For example, today the YTM (ask) for the 10 TIPS issued in January is .456%. Since this is below the .661% YTM of the original issue, the asking price is $101.617. That’s above par.
If this continues into next week, I’m going to pass on the auction simply because it is above par. Its my personal opinion that anything over par is just not worth it. Even if it does have a positive YTM.
Richard, these are very good questions and I can understand the confusion. I buy TIPS directly at auction from TreasuryDirect, not on the secondary market (through a broker), but even at auction you might get a price surprise if you are not watching the market. For example, in next Thursday’s reopening auction, the price is probably going to be a little higher than the par value, because the yield has fallen a bit since the first auction in January. If you look at the the chart in this article, you’ll see the price per $100 for each auction. Sometimes it is below $100 and sometimes it is above $100.
In the past 3 years, when TIPS began having negative yields (plus inflation) a buyer could pay a lot more than par value on the secondary market, and even at the original auction, because the Treasury won’t allow a coupon rate less than 0.125%. (When yields go negative, TIPS buyers have to pay a higher price to get the coupon rate of 0.125%.)
This is less of a problem in 2014, because TIPS yields have moved positive for issues maturing in July 2021 and beyond. When TIPS yields are positive, and you are buying a new issue at auction, the yield should be close to the coupon rate, and the price will be close to what you expect.
Once a TIPS hits the secondary market, and even when it is re-opened for another auction, the price can vary from what you expect. So you want to track the prices on the secondary market, for example this Wall Street Journal listing, updated every day:
Please forgive my ignorance. I have purchased TIPS at auction three times in the last year or so. Sometimes the price I paid was very high. Late last year, I paid more than $97,000 to purchase TIPS that were nominally worth $94,000. That’s a huge additional price and obviously cuts into the inflation coverage. To avoid that in the future I suppose I have to put a market limit on the price I’m willing to pay, correct? When TIPS Watch gives its review of current and prospective yields of various TIPS, is it taking into account the additional price that may have been paid for purchase? I obviously am revealing my ignorance here, but I am very interested in possibly purchasing more TIPS, WISELY, in the future. Is there a primer on TIPS anywhere that includes information on prices paid for them? Thank you very much.
Mel, I don’t see raising the minimum wage as increasing inflation very much. But if that change rippled through the economy, it’s possible. Wage increases will be the key to increased inflation. Without higher wages, inflation won’t be a threat. A rising stock market and rising housing prices create wealth, and probably do increase spending on high-dollar cars, houses, watches and women. But so far, that isn’t causing higher inflation.
Just a note on the stock market. For some years now Standard and Poors have been using “operating earnings” rather than “reported earnings” as the metric. (Which Vanguard also does.) Why? Because the corporations reported earnings are so phonied up with so-called one time charges and other gimmicks as to be unreliable if not just
nonsense. Just another reason to be very suspicious of the stock market in my mind.
We are buying protection, just like in all those movies!
If the president continues his campaign to raise wages, historically, the result must be higher inflation sooner or later. The question of course is which it will be. Even at the these measley (real) rates for inflation-protected securities it seems like the prudent way to go. And thanks again for your informative insights! Mel