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 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.
“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.