I noted yesterday that the Treasury has formally announced that it is reopening CUSIP 912810RF7, creating a 29-Year 8-Month TIPS with a coupon rate of 1.375%. The auction is Thursday, June 19 – non-competitive bids (like those made through Treasury Direct) must be received by noon; competitive bids close at 1 p.m.

What can we expect? I hate to call any TIPS auction a ‘stinker’ but this one is looking pretty unattractive.

CUSIP 912810RF7 was created in an auction Feb. 20, with a yield to maturity of 1.495% (plus inflation) and a coupon rate of 1.375%. This was the highest yield for any 29- to 30-year TIPS at auction since June 2011, and buyers got it at a slight discount, about $97.10 per $100 of value. (The discount resulted from the yield being higher than the coupon rate, which is typical in an originating auction.)

Since February, Treasury yields have been slipping, and this TIPS – which trades on the secondary market – has dramatically risen in value. So it is going to be a lot more expensive at next Thursday’s auction. Remember than even a small swing in yield creates a dramatic price change in 30-year Treasurys.

• Bloomberg’s Current Yields Chart this morning is flashing a yield of 1.15% and a price of $105.65 per $100 of value.
• The Wall Street Journal’s Closing Price Chart shows this TIPS closed Thursday with a yield to maturity of 1.123% and a price right around $106.
• The Treasury’s Real Yield Chart shows a 30-year TIPS yielding 1.14%.

My philosophy on TIPS is to buy them and hold to maturity, ignoring market fluctuations in the interim. Although I currently hold a couple of 30-year TIPS (maturing in 2029 and 2041) I am not a big fan of these issues because I am not likely to live long enough to hold them to maturity.

But I would especially object to paying a 6% premium to buy a TIPS that won’t mature until I am 90 years old. That means waiting a lifetime to get the benefit of that 6% premium.

And 1.14% plus inflation is not a particularly attractive yield for a 30-year TIPS, even by today’s very-low-yield standards. The original issue in February at 1.495% was a whopping 35 basis points higher. Over 30 years, that makes a difference.

We’ve had three consecutive 29- to 30-year TIPS auctions with yields of 1.33% or higher. This one looks likely to break that string. With the price at a 6% premium to par, I’ll pass.

Here’s a chart showing details for every 29- to 30-year TIPS auction in history:

Inflation breakeven rate. With the nominal 30-year Treasury trading at 3.41%, this sets up a 30-year inflation breakeven rate of 2.27%, solidly in the neutral zone (neither expensive nor cheap). It is slightly more expensive than the 2.24% breakeven rate created when this TIPS was first auctioned Feb. 20.

Here’s the trend for 30-year TIPS breakevens, showing that his auction falls in the mid-point of values:

View the interactive chart