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.)
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 future inflation.also noted investor wariness about
“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.”