The Treasury will announce later this morning that it will be offering a new 5-year Treasury Inflation-Protected Security at auction on Thursday, April 23. This will be CUSIP 912828K33. Update: Here is the announcement.
The market for 4- to 5-year TIPS has changed dramatically since the Treasury’s last auction of this term, on Dec. 18, 2014, when a a 4-year, 4-month TIPS auctioned with a yield of 0.395%, highest in 4 1/2 years.
Today we are looking at a yield in the range of -0.26%, a decline of 65 basis points since December. But that’s still well above the record low of -1.496% for the auction of a 4-year, 4-month TIPS on Dec. 20, 2012.
Because the lowest-possible coupon rate for this TIPS is 0.125%, buyers will likely be paying up at next Thursday’s auction, somewhere around $101.92 for $100 of value to produce a yield to maturity of -0.26%. (A lot can change in a week, of course.)
Inflation breakeven rate. With the 5-year Treasury currently yielding about 1.33%, this sets up an inflation breakeven rate of 1.59% for this TIPS, meaning that it will outperform a 5-year nominal Treasury if inflation averages more than 1.59% over the next 5 years. Inflation has been running at 0.0% over the last 12 months.
Alternatives. The 5-year term sets up good comparisons with other ultra-safe investments. For example, you can buy an I Bond today and be assured that you will earn at least the inflation rate over the next five years. That return will be 0.26% better than the return of this TIPS, and so an I Bond – as weak as it seems right now – is a better investment.
Another alternative is 5-year insured bank CDs, which pay 2.00% to 2.25% right now at several banks. The 2.25% return sets up an inflation breakeven rate of 2.51% for this TIPS. If you don’t believe inflation will average higher than 2.51% over the next 5 years, the bank CD is a better investment.
Why buy it? I like the 5-year term, and I was a buyer last December when the yield hit a favorable 0.395%. But next Thursday’s auction will be interesting mainly to big-money investors like central banks, pension funds and hedge funds — where small-dollar alternatives make no sense. I suspect many small investors will pass and look for better alternatives.
Here is the history of all 4- to 5-year TIPS auctions since 2007: