30-year TIPS reopening auctions with yield of 1.116%

The Treasury just posted that CUSIP 912810RF7 reopened with a yield to maturity of 1.116%, slightly higher than the market rate earlier this morning. This is a 29-year 8-month TIPS with a coupon rate of 1.375%.

Because the yield is well under the coupon rate, buyers will pay up for this issue, with an adjusted price of $108.34 for $100 of value, but buyers are getting about $1.70 of accrued inflation since this TIPS was originated in February. The unadjusted price was $106.51.

Today’s yield is well below yields at the last three 29- to 30-year TIPS auctions — 1.495% on Feb. 20, 2014; 1.330% on Oct. 24, 2013; and 1.420% on June 20, 2013.

Inflation breakeven rate. With the nominal 30-year Treasury trading today at 3.43%, this sets up an inflation breakeven rate for this TIPS of 2.31%. That means if inflation averages more than 2.31% over the next 30 years, this TIPS will outperform the traditional Treasury.

Inflation has been running 2.1% over the last 12 months, but has been showing a rising trend in the last several months.

Market reaction. The higher-than-expected yield indicated less-than-stellar demand for this TIPS, and trading in the TIP ETF – which was showing a price increase in the morning – also indicated a negative reaction:

TIPS reaction
Despite that initial reaction, media reports are saying the auction was well received, and that is reflected in the lowest yield for any 29- to 30-year TIPS auction since February 2013, when yields were half what they are today.

From the Wall Street Journal report:

A $7 billion sale of 30-year Treasury inflation bonds drew strong buying interest. Traders said some investors allocated cash out of Treasury bonds to buy TIPS, a popular instrument to hedge against inflation. …

“The TIPS auction was well received, which dovetails with my point that the market isn’t buying [Fed Chairwoman Janet]Yellen’s explanation that the recent hot CPI report was the results of statistical noise,” said Adrian Miller, director of global markets strategy at GMP Securities.

Bloomberg took a more negative outlook, noting the uptick in yield:

Treasury 30-year bonds fell the most in three months after an auction of inflation-protected securities drew a higher-than-forecast yield. …

But Bloomberg also noted the rising concern about inflation:

“It’s the inflation story — clearly people are becoming more concerned about it and the Fed seemed to discount it,” Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. discount it. “The Fed came out yesterday and said they’re going to stay at these low levels, probably longer than people had anticipating, after we got the recent inflation prints.”

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