The US Treasury just announced that its reopening of a 10-year TIPS – CUSIP 912828H45 – auctioned with a real yield (above inflation) of 0.358%. This is a 9-year, 8-moth Treasury Inflation-Protected Security with a coupon rate of 0.250%.
Because the auctioned yield ended up higher than the coupon rate, buyers got this TIPS at a discount – an adjusted price of about $98.62 per $100 of value. The discount was a little greater because this TIPS has an inflation index of 0.99633, meaning it remains slightly below par value after several months of deflation. So technically buyers are paying $98.62 for $99.63 of value as of May 29, the issue date.
Inflation breakeven rate. Comparing the yield of 0.358% with the current yield on a 10-year nominal Treasury (2.21%), we get a 10-year inflation breakeven rate of 1.852%. This means that if inflation average higher than 1.852% over the next 10 years, this TIPS will outperform a nominal Treasury. This is a historically low number, but reflects the muted level of inflation over recent years.
Six months ago, a similar TIPS reopening resulted in a real yield to maturity of 0.497% and a very similar inflation breakeven rate of 1.853%. This indicates that TIPS yields are tracking closely with those of traditional Treasurys.
Reaction to the auction. In the minutes after the auction, the TIP ETF, which holds a broad range of maturities, had minimal reaction. TIPS had been trading slightly higher all morning, indicating that yields were trending slightly down.
Bloomberg’s Alexandra Scaggs noted that the auction “attracted the lowest demand since September 2014.”
“We’re just simply not too wrought up about inflation expectations at the moment,” said Jim Vogel, interest-rate strategist with FTN Financial in Memphis, Tennessee. …
’’There was some concern that the market was beginning to doubt the Fed’s ability to get inflation back up, but that fear has dissipated a little bit,’’ said Joshua Feinman, New York-based global chief economist with Deutsche Bank Asset & Wealth Management, which oversees $1.3 trillion. But now, “most of the impact has already been priced into the market.”
Thanks for your efforts, much appreciated. I am still (attempting) to research how the Treasury decides how to apportion their auctions between nominal and inflation-indexed notes. Perusing publications of the Federal Reserve banks I find little of interest. No doubt a Top Secret security clearance is necessary. They are, of course, interested in minimizing the government’s cost of borrowing. Or to put it in the vernacular- screwing us.