The Treasury just announced that its reopening of CUSIP 912828C99 – creating a 4-year, 4-month Treasury Inflation-Protected Security – auctioned with a yield to maturity of 0.395%. This is the highest yield – and first positive yield – for any 4- to 5-year TIPS since an April 2010 auction generated a yield of 0.550%.
Because this reopened TIPS has a coupon rate of 0.125%, buyers got it at discounted price of $98.85 for $100 of value. However, adding in 8 months worth of inflation appreciation creates an adjusted price of $100.17.
The auction capped a remarkable month of surging yields for shorter-term TIPS. On Dec. 1, this TIPS traded on the secondary market with a yield of -0.048%.
Inflation breakeven rate. With a 5-year nominal Treasury trading to at 1.66%, this sets up an inflation breakeven rate of 1.26% for this TIPS. If inflation averages more than 1.26% over the next five years, this TIPS will outperform a nominal Treasury.
That low breakeven rate indicates the market is pricing in very low inflation in the short term. In addition, the market was aware that November’s 0.54% drop in non-seasonally adjusted inflation will mean a future ding in this TIPS’ accumulated principal.
Reaction to the auction
The broadly-based TIPS ETF (ticker TIP) had been declining all morning, indicating that yields were on the rise. Once the auction closed at 1 p.m., the TIP ETF made a move higher, which generally shows a positive reaction.
Bloomberg’s report on the auction noted the first positive yield in four years on this TIPS maturity helped drive demand from big-money investors like foreign central banks:
“There was strong customer demand, likely showing bargain-hunting by the investor base,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “It seems to be less about inflationary fear and more about asset managers who have money to put to work in the sector taking advantage of the first positive yield on the five-year since April 2010.”