The Treasury just announced that its reopening auction of CUSIP 912828H45 auctioned with a real yield (after inflation) to maturity of 0.2%, the lowest yield for an 9- to 10-year TIPS at auction since May 2013.

This Treasury Inflation-Protected Security has a coupon rate of 0.25%, so that means buyers at today’s auction had to ‘pay up’ slightly to get that coupon rate. However, because this TIPS has an inflation index of 0.98686, the adjusted price worked out to $99.16 per $98.68 of value, but par is guaranteed to rise to at least $100 at maturity.

Today’s yield was much lower than looked likely just two days ago, when this TIPS closed on the secondary market with a yield of 0.425%. The dramatic dip in yields came after the Federal Reserve announced it would be cautious in raising short-term interest rates this year. That move boosted the TIPS market because 1) short-term interest rates will remain very low for the near term and 2) the Fed indicated – once again – that it is willing to risk rising inflation if it results in job creation and rising wages.

Inflation breakeven rate. A nominal 10-year Treasury is trading right now at 1.97%, creating an inflation breakeven rate of 1.77%, about 5 basis points higher than the breakeven rate of a week ago, but still solidly in the ‘cheap’ range, indicating this TIPS is attractive versus a traditional Treasury.

Reaction to the auction. The TIP ETF, which holds a broad range of maturities, was trading down most of the day, but after the auction closed at 1 p.m., its price moved upward, indicating declining yields and a positive reaction to the auction.

Bloomberg’s report on the auction noted the effect the Federal Reserve’s cautious statement had on the TIPS market:

The U.S. Treasury Department can thank the Federal Reserve for the surge in demand at Thursday’s auction of inflation-protected bonds.  … “The Fed backing away from its harsh stance frees inflation expectations to rise a little bit more,” said Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee.