I am on the road this week and away from my computer, so I don’t have access to all my usual stuff. Oh well, I’ll try to provide a quick analysis of next Thursday’s auction — a reopening of CUSIP 912810RL4, creating a 29-year, 8-month Treasury Inflation-Protected Security.
I also advise that a 30-year TIPS with a coupon rate of 0.75% can be a very dangerous investment if you can’t afford to hold it to maturity. If you are a TIPS buy-and-trader, you could be sitting on a time bomb. …
(This TIPS) doesn’t have much appeal for a small investor as a 30-year commitment, and it could be a very volatile issue for traders. (This TIPS will be reopened in June and October; if yields rise it could be a lot cheaper then.)
It auctioned on Feb. 19 with a coupon rate of 0.750% and a yield to maturity of 0.842%, generating the lowest yield for any 29- to 30-year TIPS auction since February 2013.
Tick, tick, tick …. This thing was bound to explode. In only four months, the market yield on a 30-year TIPS has risen from 0.842% to about 1.14% today. This TIPS has lost 10 percent of its value, and is currently trading with a price of about $90.09 per $100 of value.
- The $90.09 price quoted above is from Bloomberg’ Current Yields page, which tracks real-time prices of TIPS on the secondary market. You can watch that page over the next week if you are interested in investing in this TIPS reopening.
- The Wall Street Journal’s Closing Prices page shows this TIPS closing Thursday with a yield of 1.144% and a wide bid-to-ask spread – centered around $90 per $100.
- The Treasury’s Real Yields Curve page estimates a full-term 30-year TIPS would yield 1.17% at the close Thursday, down from 1.25% from Wednesday.
This TIPS will carry an inflation index of 1.00468 on the June 30 closing date, which will slightly raise the price a TIPS will cost buyers.
For example, let’s say the yield comes in at 1.14% and the price is $90.09 per $100 of value. If you bought $10,000 of this TIPS, the inflation adjustment would raise your purchase to $10,046.80, but you would be buying at a discount ($90.09 per $100) so your total cost would come to around $9,051 for $10,000 par.
Still, even with the discount, I can’t see this TIPS being a slam-dunk purchase. An after-inflation yield of 1.14% is still very low by historical standards for a 30-year TIPS. But it’s certainly a lot more attractive than the February auction’s 0.842%.
Note: If held in a taxable account, the 0.75% coupon rate on this TIPS will make it just barely cash-flow positive over nearly 30 years. You will owe taxes in the current year for inflation adjustments to principal, but you won’t get that money until you sell the TIPS or it matures. Keep that in mind.
Here is a history of all 29- to 30-year TIPS auction. I’ll be posting next week before and after the auction: