Source: Bloomberg

My reaction: “Are my eyes deceiving me?”

A 5-year TIPS is trading on the secondary market with a yield to maturity of 0.31%, just 17 basis points below the yield on a 10-year TIPS, and only 54 basis points below a 30-year TIPS.

This is amazing – and the trend continues to make Thursday’s reopening of CUSIP 912828C99 the year’s most interesting TIPS auction. This is the same 5-year TIPS that is listed in the chart above, with an amazing yield of 0.31%.

One year ago – on Dec. 12, 2013 – TIPS were trading with drastically different yields, according to the Treasury’s Real Yields chart:

• 5-year: -0.10%, 41 basis points lower than today.
• 10-year: 0.75%, 27 basis points higher than today
• 30-year: 1.63%, 78 basis points higher than today
  

Obviously, the market is pricing in extremely low inflation in the near term, causing the demand for short-term TIPS to plummet, and the yield to rise. The 5-year inflation breakeven rate is down to 1.26%, indicating the market believes inflation will run around that number for the next 4 years, 4 months – the remaining term on this TIPS.

If you think inflation will end up higher, this TIPS is a definite buy versus a nominal 5-year Treasury, which is currently yielding 1.57%.