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.”


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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