The Treasury just announced next week’s TIPS auction: CUSIP
912828H45, a new issue with the coupon rate to be determined at auction.
This auction will come amid a lot of turmoil in financial markets, with Treasury yields plummeting while the stock market shows a lot of volatility. Our current trend of very low inflation (and even deflation) is also reducing demand for Treasury Inflation-Protected Securities, an investment that hedges against unexpected future inflation.
So this isn’t shaping up to be an attractive auction for buyers. Here’s what we know today:
- Bloomberg’s Current Yields page shows a 9-year, 6-month TIPS currently trading with a yield to maturity of 0.23%.
- The Wall Street Journal’s TIPS Closing Prices page shows that same TIPS closed yesterday with a yield of 0.24%.
- The Treasury’s Real Yields Curve page estimates that a full-term 10-year TIPS would yield 0.29%.
So at this point, with the auction a week away, it appears this new TIPS issue will get a coupon rate of 0.250% and a real yield (after inflation) a bit higher than that. A year ago, a 10-year TIPS went off with a yield of 0.661% – about 37 basis points higher. In fact, only one auction of a 9- to 10-year TIPS in the last nine went off with a yield below 0.30% – on July 24, 2014, with a yield of 0.249%.
Interesting side note. Next Thursday’s auction will create two TIPS maturing on Jan. 15, 2025, and I believe it will be the first time ever the Treasury had two TIPS maturing on the same day. It looks like this in the Wall Street Journal’s chart:
This is CUSIP 912810FR4, a 20-year, 6-month TIPS that was first issued July 15, 2004. If you bought that 10 years ago (I didn’t, unfortunately) you are loving that 2.375% coupon, which you earn in addition to inflation. I’ll just note that a 30-year nominal Treasury is yielding about 2.47% this week. This TIPS might yield slightly higher than the new one coming next Thursday, but it comes at a lofty cost: About $120 per $100 of value plus 25% in inflation appreciation. Ouch. And I wouldn’t want to be buying inflation appreciation at a time when we face several months of deflation, which will reduce the accrued principal.
Inflation breakeven rate. With the 10-year nominal Treasury currently yielding 1.87%, a TIPS yield of 0.29% would create a 10-year inflation breakeven rate of 1.58% – which puts this TIPS solidly into the ‘cheap’ zone versus a 10-year Treasury. If inflation averages higher than 1.58% over the next 10 years, it will outperform the nominal Treasury. As you can see from this chart, breakevens are approaching their lowest levels of the last five years. And you can also see they don’t stay this low for long:
But ‘cheap’ doesn’t necessarily equate to ‘attractive.’ A yield of 0.29%, plus inflation, on a 10-year TIPS isn’t very attractive. In fact, just two months ago, a 4-year, 4-month TIPS went off with a yield of 0.395%, 10 basis points higher.
It will be interesting to see how demand develops for this auction. Here is a chart of recent 9- to 10-year TIPS auctions to study until then: