In an auction that capped two days of turmoil in the market for Treasury Inflation-Protected Securities, the Treasury just announced that CUSIP 912828B25 was reopened with a yield to maturity of 0.659% plus inflation, just under the 0.661% this TIPS generated at its initial auction on Jan. 23.
View the Treasury announcement.
This is a 9-year, 10-month TIPS with a coupon rate of 0.625%, meaning today’s buyers are getting it at a slight discount, with an adjusted price of about $99.91 per $100 of value, including in a small amount of inflation appreciation since January.
Although this auction broke a string of of eight consecutive 9- or 10-year TIPS auctions with higher yields, buyers today benefited from an upswing in TIPS yields this week, in reaction to the Federal Reserve’s cloudy message on future interest rates. On Monday, this same TIPS closed on the secondary market at 0.493%. That’s a jump of 17 basis points in four days.
Inflation breakeven rate. The nominal 10-year Treasury closed Wednesday with a yield of 2.78%, and has barely budged this afternoon at 2.77%. The 2.77% yield sets up a 10-year inflation breakeven rate of 2.11%. This is a fairly attractive number, and down slightly from the 2.12% of the January auction. It means that if inflation averages more than 2.11% over the next 10 years, this TIPS will outperform a traditional Treasury.
Reaction to the auction. The Wall Street Journal noted ‘lackluster demand’ for TIPS at this auction, ‘reflecting uncertainty about the economy’s ability to generate inflation in the coming years.’ From the report:
After starting the year strong, TIPS have had a tough time in March, handing owners a 0.7% total loss so far through Wednesday. TIPS are a hard sell these days, with the combination of little inflation in the current economy and the Federal Reserve cutting down on stimulus.
The Bloomberg report also noted pointed at low inflation as the cause for the ‘below-average demand’ at this auction:
“It’s a negative environment for inflation right now,” said Aaron Kohli, an interest-rate strategist at primary dealer in New York BNP Paribas SA. … “Investors are not worried about inflation anytime soon. Any risk premium that had been built in is just going away. If the Fed is on a path to taper when inflation is low, it makes no sense to build in a risk premium.”
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This blog is a great benefit for those interested in TIPS, and I applaud the author. Personally, I will note that TIPS are a/the most conservative US$ investment, and provide minimal profit for middlemen, and therefore minimal incentive for ‘the system’ to provide clarity! SO, I urge people to take the time to get it all straight!! (I intend the same remarks for iBonds.)
Look at what ‘the system’ DOES keep nearly never seen, to fool the people:
Real Homes, Real Dow
Rich, on a reopening auction you first look at the coupon rate, which in this case was 0.625%. Then look at the current yield of that TIPS on the secondary market. You can find this in several places, you need to know the maturity date of the TIPS you are buying. I detailed those sources in this post: https://tipswatch.com/2014/03/13/up-next-10-year-tips-reopening-will-auction-march-20-2014/
If the yield on the secondary market is above the coupon rate, you buy the TIPS at a discount to par. If it is below the coupon rate, you buy the TIPS at a premium to par. In the case of this week’s auction the yield swung from below the coupon rate to slightly above it, all in two days. That can happen, so you should wait to place your order near the auction.
When a TIPS is auctioned the first time, the coupon rate is set just below the yield, so you wouldn’t see much variance in price in the current market for 10- and 30-year TIPS.
BUT … in the first half of 2013, if you were buying any TIPS at auction of less than 30 years maturity, you were going to pay a premium because yields had moved into negative numbers, while the coupon rate could not go below 0.125%. That isn’t happening now except for 5-year issues, which continue to have negative yields, and so those will require a premium.
Hope this helps.
Thanks very much. I’ll study what you’ve just told me. I’ve been waiting for somebody to help me with this for a very long time. I’m very appreciative.
Since I’ve got a rule to not buy anything over par and this one was too close to call yesterday, I passed on it. Turns-out it came in just under par, dammit. Today, the YTM has dropped to just under .600. That means the spread is 2.163%. I was hoping that the yield would continue to trend upwards today and provide something worth buying. So far, that hasn’t been the case.
Jimbo, how did you know there was a danger you might be buying something over par? Where and how (using what yardstick or whatever) do you check this? Thanks very much
Amazing how the market (over)reacts isn’t it? One supposes a penny here and a penny there, and it all adds up. Interesting commentary as usual. Fred