10-year TIPS reopening auctions with a yield of 0.339%

The Treasury just announced that the reopening of CUSIP 912828B25 auctioned with a yield to maturity of 0.339%, plus inflation. This is a 9-year, 8-month TIPS with a coupon rate of 0.625%.

That yield, which was expected, is a big drop from the 0.661% this same TIPS yielded when it was first auctioned Jan. 23. It was reopened in March with a yield of 0.659%. Since then, however, Treasurys have rallied and yields have declined.

Buyers at today’s auction paid about $102.70 per $100 of value, but when accrued inflation is added in, the resulting adjusted price is about $103.96. Read the announcement for details.

Inflation breakeven rate. With the nominal 10-year Treasury currently trading at 2.55%, this sets up a 10-year inflation breakeven point of 2.18%. This means that if inflation averages more than 2.18% over the next 10 years, this TIPS will outperform a traditional Treasury. An inflation breakeven point below 2.2% is fairly attractive.

The initial market reaction to the auction was positive, with the TIP ETF getting a strong boost today when the auction results were announced. (A higher price indicates lower yields for TIPS.)

Auction reaction
Reaction to the auction. The Wall Street Journal’s Min Zeng reported ‘strong demand‘ for this TIPS.

The highlight of the day was a $13 billion sale of 10-year Treasury Inflation-Protected Securities, known as TIPS, which drew the biggest overall demand in two years. A gauge of demand from foreign investors, known as indirect bid, surged to a record of 66.3%. The results suggested some investors believe inflation in the long term may rise even if price pressures in the U.S. have remained tame amid an uneven pace of economic growth.

“It was very aggressive bidding,” said Marcus Huie, interest-rate strategist at Bank of America Merrill Lynch. “Some investors bet inflation is going to trend up,” especially as comments from some Fed policy makers suggested the central bank would keep interest rates low for longer.

I would note, however, that the ‘aggressive bidding’ ended up with a yield that was actually higher than it had been a week earlier, when this TIPS was trading at 0.291%. This auction went almost exactly as expected.

More from the WSJ report:

Economists at Barclays PLC said the tide of inflation is turning and they expect the U.S. inflation rate to rise to 2.4% by December.

“The last two CPI reports have swayed investor sentiment toward a greater probability of inflation acceleration,” said Keith Price, head of inflation trading at Citigroup Global Markets in New York.

Bloomberg’s Cordell Eddings also noted investor wariness about future inflation.

“Break-evens were cheap going into the auction, and that is why the auction went so well,” said Michael Pond, the New York-based head of global inflation-linked research at the primary dealer Barclays Plc. “Given the realized inflation backdrop, break-evens offer value as realized inflation continues to tick up.”


About Tipswatch

Author of Tipswatch.com 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.
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6 Responses to 10-year TIPS reopening auctions with a yield of 0.339%

  1. Mike says:

    Great website. One of the best. How would you analyze using a 10 year CD paying 3.30% in place of this TIPS as part of a TIPS/bond ladder in a tax advantaged account?

    • tipswatch says:

      Mike, I am not buying TIPS at these yields, but I did buy a 5-year CD from PenFed earlier this year with a yield of 3.0%. (They’re offering only 1.51% today). I would definitely consider a 10-year CD paying 3.3%, that pushes the inflation breakeven point to about 2.96%. There’s a decent chance that this CD would outperform a 10-year TIPS.

  2. tipswatch says:

    Ed, yes, I am a genius. This time! I posted that about 10:30 am, by the way. But I also know that in the past I have been miserably wrong in predicting the yield, especially for new issues.

    • Ed says:

      Maybe a table.

      Auction date
      New or Reopening?
      Auction yield
      Prediction – Auction yield
      Ahead of time of prediction

      BRAGGING — maybe such a table is minimally available for regular UST auctions?

  3. Ed says:

    Congratulations on the excellence of your “wild guess of a yield of about 0.34% at auction today” made ahead (how much?) of the non-competitive bid deadline!!! You might want to remind people of this, to encourage paying attention to TIPS, which we all reckon as healthy for society!

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