The 10-year TIPS quandry: What should the Treasury do in January 2015?

UPDATE (Sept 4, 2014): The Treasury has posted its newest preliminary auction schedule, which shows that it will auction a new 10-year TIPS on Jan. 28, 2015, with a maturity date of Jan. 15, 2025. That means there will be two TIPS maturing on that date; the existing one has a coupon rate of 2.375% and sells at a 20% premium to par, so there shouldn’t be too much confusion in the secondary market.

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Awhile back reader Bill noticed something interesting: The Treasury is tentatively scheduled to auction a new 10-year TIPS in mid January, with a maturity date of Jan. 15, 2025. But it already has a TIPS maturing on Jan. 15, 2025: CUSIP 912810FR4, a 20-year, 6-month TIPS that was first issued July 15, 2004.

As far as I can tell, the Treasury has never had two separate TIPS maturing on the same day. I’ve poured over the excellent charts at eyebonds.info (this one in particular) and can’t find any two TIPS that matured on the same day.

After Bill pointed this out, I emailed Treasury Direct with the question: What will the Treasury do in January 2015? In return, I got an email with a chart showing the typical auction schedule and this stock narrative:

The Treasury Department endeavors to be as predictable as possible in the scheduling of auctions to assure that the commercial market works smoothly and efficiently. The following chart illustrates the general pattern of securities offerings. While this chart does provide a reference for when securities are likely to be sold, an offering of securities isn t official until Treasury makes a public announcement (press release) of the details of the issue.

Treasury financing policy decisions and borrowing needs will sometimes change the general pattern of offerings.

In other words … stay tuned. I think it’s possible – maybe most likely – that the Treasury will just create a new 10-year TIPS and live with two maturities on the same date. It would create a little confusion in the secondary market, however, because TIPS are usually listed by maturity date. If anyone has any ideas why this would cause problems, let me know.

But let’s use our imaginations for ‘possibilities’ for January 2015:

  • Issue a new 10-year TIPS. Follow the auction schedule and live with the dual maturities and possibility of some confusion in the secondary market.
  • Issue a new 10-year, 6 month TIPS. This would push the maturity to July 2025, which is currently open, but would mess up the scheduled July 2015 auction of another new 10-year. So, not likely.
  • Issue a new 20-year TIPS. This would be a ‘coup’ – the ultimate surprise. The Treasury issued 20-year TIPS from 2004 to 2009, always in January except for the oddball CUSIP 912810FR4, which was created as a 20-year, 6-month TIPS and then reopened in January 2005. That is the TIPS that matures in January 2025.
  • Reopen CUSIP 912810FR4. Not likely. This TIPS carries a coupon rate of 2.375% and about a 26% principal increase in accrued inflation. That would be massively expensive for the investor of a TIPS likely to yield around 0.26%. (It is currently trading at about $121 for $100 of value on the secondary market.)
  • Switch January to a 5-year auction. This doesn’t work because there is already a TIPS maturing January 2020.
  • Switch January to a 30-year auction. This would work if the Treasury wanted to totally reshuffle its auction lineup. But it would complicate getting two 10-year auctions into one year, each with two reopenings.

Let’s get behind the 20-year! I love the idea of a 20-year TIPS because for the baby-boom investor, a 20-year term still fits in our lifespan. It also substantially raises the yield, from 0.26% to about 0.70% in the current market. (It also substantially raises the volatility for a buy-and-trade investor.)

A 20-year TIPS would allow the Treasury to lock in today’s ultra-low yields for a longer term. So it makes sense for both the Treasury and the investor.

But would the Treasury do this? Why not?

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2 Responses to The 10-year TIPS quandry: What should the Treasury do in January 2015?

  1. Len says:

    You lost me there my friend. Locking in a low rate makes sense for the investor? For twenty years, if you buy and hold? If outside a tax-deferred account you’ll undoubtedly be creating tax problems. When interest rates rise your note will be “under-water” , perhaps for a very long time. Unless massive inflation is on the horizon I think I’ll just keep my powder dry for now.

  2. tipswatch says:

    Len, I agree that I probably wouldn’t buy a 20-year at 0.7% yield, plus inflation, but I probably would at 1.7%, plus inflation, especially in a tax-deferred account. It would be a nice option for the future. I don’t think the Treasury actually targets TIPS at regular investors, they are primarily used by very big investors, including pension funds and foreign central banks.

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