Hate to admit this auction announcement actually slipped past me (I’ve been out of town lately), but maybe it’s for the best because conditions in the TIPS market have been changing dramatically in the last two weeks. So, yeah, oops, the Treasury announced last Thursday that it will reopen CUSIP 912828WU0 on Sept. 18, creating a 9-year, 10-month TIPS with a coupon rate of 0.125%.
This will be a fascinating auction because CUSIP 912828WU0 was first auctioned July 24, 2014, with yield to maturity of 0.249% (plus inflation). Because that yield fell just below the 0.250% mark, the Treasury set the coupon rate one notch (1/8 percent) lower, to 0.125%, the lowest possible on any Treasury Inflation-Protected Security.
Now, add in the rising yields of the last two weeks, and you get a TIPS selling at a pretty nice discount, a rarity in TIPS auctions of the last three years. Here’s what we can say right now about CUSIP 912828WU0, after the close of market Monday:
- Because this TIPS trades on the secondary market, you can track its real-time value at Bloomberg’s Current Yields page. Not always totally accurate midday, but at this moment it is showing a yield of 0.46% and a price of about $96.81 per $100 of value, a discount of more than 3%.
- The Wall Street Journal’s Closing Prices page is showing a yield of 0.444% and a price right around $96.81 per $100 of value.
- The Treasury’s Real Yields page is estimating a yield to maturity of 0.47% for a full-term 10-year TIPS. This is 20 basis points higher than the yield estimate for Sept. 2, just two weeks ago.
So in the two months since its original auction, CUSIP 912828WU0 has gone from ugly ducking to ‘sorta-homely-but-more-interesting.’ Keep in mind that six months ago, a similar 9-year, 10-month TIPS auctioned with a yield to maturity of 0.659%. That was in March 2014, before Treasury yields started another decline.
The very recent trend has been rising Treasury yields, and that could cause some uneasiness at Thursday’s auction. Could that mean an upside yield surprise? We’ll find out at 1 p.m. Thursday.
Also, watch for Wednesday’s report on the Consumer Price Index. The expectation is for continued mild inflation. A surprise in either direction could upset the TIPS market.
Inflation breakeven point. With a 10-year TIPS yielding 0.47% and the 10-year traditional Treasury yielding 2.60%, this sets up an inflation breakeven rate of 2.13%. If inflation averages more than 2.13% over the next 10 years, CUSIP 912828WU0 will outperform a traditional Treasury. This is on the lower end of the ‘moderate’ scale, meaning this TIPS is fairly cheap, at least versus a traditional Treasury.
For the record, here is a chart of all 9- to 10-year TIPS auctions since January 2008:
Jimbo, great thoughts, as usual. The fact that the 10-year inflation breakeven rate is dipping toward 2.1% indicates 1) lower buyer demand for TIPS against other Treasurys, and/or 2) a real belief that inflation will be mild for the next 10 years. I have no idea what inflation will be in 5 to 10 years, and that is what makes TIPS a solid investment. If you lose with low inflation, the loss is very small, practically insignificant, but the potential gain with higher inflation is substantial.
Since I’ve been a net seller of TIPS this year, I’ve been looking for an excuse to purchase more. If the YTM on the secondary market goes above 0.5% on Tuesday or Wednesday, I’ll probably buy a few on the secondary market. If the FED’s “guidance” later in the week doesn’t ruin the momentum of the last two weeks, I may even pop for a few more on the re-issue. Since the YTM, on the original issue was below 0.5% I passed on it. This means I’ve got zippo TIPS with a maturity date of 7/2024. What’s so magical about 0.5%? Well, the best 5 year CD out there is at 2.3%. With inflation currently around 2.0% that makes the 10 TIPS a better deal than a 5 year CD. I’m looking at the 10 year TIPS as the equivalent of a 10 year CD with inflation protection. This is the sort of mental gymnastics that people who want to buy TIPS have to sink to these days to rationalize making a purchase. Not too long ago, the TNX had sunk to 2.32%. I really wanted to take a profit on some of the TIPS that I had purchased earlier in the year. But, that would have left me with hardly any TIPS. With a trade war going-on between the US/EU versus Russia, an outright war going-on between the Ukraine and Russia, the emergence of a “Caliphate” in the Mideast, China tanking, Europe stagnating and God knows what else will happen next week, I thought it just might be nice to have a few TIPS hanging around (just in case things “really” get bad). And, the DOW’s response to all of this? It’s up over 17,000 again today!