The Treasury just announced that its reopening of CUSIP 912828WU0, creating a 9-year, 8-month Treasury Inflation-Protected Security, auctioned with a yield to maturity of 0.497% (plus inflation).

Because this TIPS carries a coupon rate of 0.125% – set at the original auction in July – today’s buyers got it at a discount – about $96.73 per $100 of value, figuring in a small amount of inflation appreciation since July.

Inflation breakeven rate. With the 10-year traditional Treasury trading today at 2.35%, this sets up an inflation breakeven rate of 1.853% for this TIPS. If inflation averages more than 1.85% over the next 10 years, it will outperform a traditional Treasury. This is a pretty attractive number – any breakeven rate below 2.0% for a 10-year TIPS indicates that TIPS are cheap against traditional Treasurys.

Here’s a chart of 10-year breakevens dating back to 2010:

I’ll be updating this post later today with reaction to the auction, but the quick reaction in the TIP ETF after the auction closed at 1 p.m. seems to indicate it went well for the Treasury, with yields dropping this afternoon:

Reaction to the auction

The Wall Street Journal pointed out that this morning’s inflation report helped boost demand for this auction, because the flat number was slightly higher than expected:

The CPI report gave a boost to a $13 billion sale of 10-year Treasury inflation-protected securities on Thursday afternoon. The decent auction demand was a sign buyers deemed the recent selloff has turned the asset class into a bargain for inflation protection.

“The recent underperformance of TIPS seems to have started to attract some interest, especially given a better than expected CPI number,” said George Goncalves, head of U.S. interest rates strategy at Nomura Securities International in New York.

Bloomberg’s report noted strong demand for this auction, pointing out that the yield came in below 0.50% – hah!, which I had predicted:

“There was a lot of customer demand,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of the 22 primary dealers that are obligated to bid at Treasury sales. “All things considered, it was a bulls-eye.” … The notes were sold at a yield of 0.497 percent, compared with an average forecast of 0.504 percent in a survey of six primary dealers.

Reuters pointed out (in a paragraph that places way too much importance on 2 basis points) that 10-year breakevens rose after the auction as TIPS prices rose and yields declined (very slightly):

This gauge of investors’ long-term inflation expectations, as measured by the yield gap between 10-year TIPS and regular 10-year Treasury notes widened as much as 2 basis points to 1.86 percent after the 10-year TIPS auction.