The Treasury just announced that a new 5-year TIPS, CUSIP 912828C99, auctioned with a yield to maturity of -0.213% and a coupon rate of 0.125%. The combination of negative yield and positive coupon rate means that buyers paid an adjusted price of $101.87 for $100 of value, which includes about 5 cents of inflation adjustment through April 30.

Read the announcement.

The yield of -0.213% continued a string of 11 consecutive 4- to 5-year TIPS auctions that produced a yield negative to inflation. Because the principal balance of a TIPS grows with inflation, buyers today accepted a return 0.123% less than inflation over the next five years.

When you look at the 5-year inflation breakeven rate, you can see why some buyers would find this issue attractive. A 5-year nominal Treasury is trading right now at 1.70%,  setting up an inflation breakeven rate of 1.91%, meaning that this TIPS will outperform a traditional Treasury if inflation averages more than 1.91% over five years.

Even if this 5-year TIPS under-performs, it probably won’t be by much, so TIPS buyers aren’t giving up much yield to get the inflation protection.

Two weeks ago, this TIPS looked likely to carry a positive yield, but Treasurys  strengthened as the stock market weakened and turmoil rose again in Ukraine. The TIP ETF was up strongly in the minutes after the auction closed, indicating a positive reaction to the auction.

At 11:14 a.m., before the auction closed, Bloomberg forecast a yield of -01.62%, based on a survey of primary dealers.

So it looks like the Treasury is the winner in today’s auction.

Reaction to the auction

The Wall Street Journal’s Cynthia Lin noted ‘a strong turnout’ for this auction, noting that the yield of 0.213% was less than the market rate at the time of the sale,  “reflecting strong demand.”

Bloomberg’s Cordell Eddings noted strong demand from overseas buyers, which include central banks.

The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.7, matching the highest level since December 2012. “The stats were off the charts,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., a primary dealer.