The U.S. Treasury announced today it will reopen CUSIP 912828B25 in a May 22 auction, creating a 9-year, 8-month Treasury Inflation-Protected Security with a coupon rate of 0.625%. Noncompetitive bidding closes at noon and competitive bidding ends at 1 p.m.
What to expect. Since this TIPS currently trades on the secondary market, we can get a pretty good idea of its yield to maturity, which will be set by the auction bidding. It was first auctioned on Jan. 23 with a yield of 0.661%, plus inflation. It was reopened March 20 with a yield of 0.659%. Since then, however, Treasurys have rallied and yields have declined.
- Bloomberg’s Current Yields shows this TIPS trading today with a yield of 0.29% and a price of about $103.18 per $100 of value.
- The Wall Street Journal‘s chart of TIPS closing prices shows that this issue closed yesterday with a yield of 0.350% and a price of about $102.62.
- The Treasury’s Daily Yield Curve site estimates that a TIPS with a full 10-year maturity is yielding 0.37%.
With that information, I’d say if the auction were today it would probably go off with a yield of about 0.32%, plus inflation, which is well below the coupon rate of 0.625%. That means buyers will have to ‘pay up’ to get that coupon rate bonus, probably somewhere around $102.75 per $100 of value.
The Treasury market has had a fairly strong rally this year, narrowing some of the gains in yield we saw beginning in mid-2013. This chart shows how the much yields have fallen since the beginning of 2014:
The upper two lines show the yield curve for nominal Treasurys and the lower two lines show the yield curve for TIPS, where the shortest maturity at auction is 5 -years.
Inflation breakeven rate. Looking at the inflation breakeven point can give you an idea if TIPS are ‘expensive’ or ‘cheap’ versus a traditional Treasury of the same maturity. Using yesterday’s closing numbers – 0.37% for a 10-year TIPS and 2.54% for a 10-year Treasury – you get an inflation breakeven of 2.17%, a fairly attractive number. This means that if inflation averages more than 2.17% over the next 10 years, the TIPS will outperform a nominal Treasury.
Here is a chart showing that the breakeven rate historically tends to fall into the 2.0% to 2.5% range, with rates below 2.0% indicating TIPS are ‘cheap’ and above 2.5% indicating ‘expensive.’ Right now TIPS seem reasonably priced against Treasurys.
This auction: Yes or No? My personal strategy has been to be patient in buying TIPS, not adding lavishly to my holdings while yields are so low. This auction will generate a fairly disappointing yield and come at an above-par price. If it comes in with a yield around 0.30%, that will be lower than the last five 9- to 10-year TIPS auctions. Not good.
Here is a chart of recent TIPS auctions, which shows the yield trend has been on the rise since January 2013. Next Thursday’s auction could seriously break that trend, and I will be sitting this one out.
Treasury Inflation-Protected Securities 
Ed, that chart comes from the St. Louis Fed, but the chart has to be updated each time I generate it. I am away from the computer with the link for a week. I’ll get it to you later.
Dave, This is in your post
I would like to pay attention to this currently. Might you please give the URL to do that, still including the history. Thank you.
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Cynthia Lin of the Wall Street Journal always writes a story after each auction, with reaction, but that story never makes it into the printed WSJ. They just print the auction results in very fine print. I can tell you this: TipsWatch is the only consistent source of updated information on TIPS and I Bonds, which I find pretty amazing.
NO surprise to me guys! Look at these that the media nearly never show:
http://www.showrealhist.com/yTRIAL.html
I figure that the media (dominantly funded by paid advertising) are editing by asking “But, what is intellectual honesty’s cash flow?”.
Thanks again for all your efforts. I’m no Internet ranger but I suspect this is the best info on inflation-indexed Treasuries online. Always had the feeling Wall Street would like to pretend they just don’t exist.