The US Treasury announced yesterday it will be creating a new 10-year Treasury Inflation-Protected Security at an auction next Thursday – July 23, 2015. This is CUSIP 912828XL9 and the coupon rate and real yield to maturity will be set at auction.
I consider the 10-year maturity the ‘sweet spot’ for buy-and-hold TIPS investing, since it fits into most people’s life expectancy (versus the 30-year) and gets a bump in yield (versus the 5-year). The Treasury must agree, since it creates two new 10-year TIPS each year and reopens each twice, for a total of six 9- to 10-year TIPS auctions a year.
And this auction comes at an interesting time. Things in Europe and China seem to be settling down, causing the ‘flight to safety’ to Treasurys to wane. That means yields have been rising, although not dramatically. There has been a lot of volatility this year in the 10-year TIPS yield, but yields have been returning to their 2015 highs:
Here’s what we can say right now about next Thursday’s auction:
- Bloomberg’s Current Yields page shows the most recent 10-year TIPS (CUSIP
912828H45, issued in January) is trading on the secondary market with a real yield to maturity of 0.49%.
- The Wall Street Journal’s Closing Prices page shows that same TIPS closed yesterday with a yield of 0.479%.
- The Treasury’s Real Yields page estimates that a full-term 10-year TIPS would have closed yesterday at 0.52%. That number is in line with the Bloomberg and Wall Street Journal numbers, since a full-term TIPS should yield slightly higher.
So at this point we’re looking at a 10-year TIPS with a real yield (after inflation) to maturity of around 0.52% and possibly a coupon rate of 0.50%. But a lot can happen in a week, especially with the market volatility we have seen around the world.
Is 0.52% an attractive yield? Not really, but some might consider it acceptable. If you look back at the last 15 auctions of 9- to 10-year TIPS, going back to January 2013, the distribution of yield looks like this:
- 5 had a yield of 0.500% or higher, the highest was 0.661% in January 2014.
- 7 had a yield between 0.0 and 0.499%
- 3 had a negative yield, the lowest was -0.630% in January 2013.
So this auction is shaping up as ‘upper middle of the recent pack.’ Not exciting, but also not horribly unattractive.
The questions. Where do you think interest rates are headed? Do you see the Federal Reserve stepping up later this to raise short-term rates? Even if that happens, do you see the Fed action having much effect on longer-term rates? And will the Fed make just a token move higher will no followup? Will interest rates begin rising in Europe, making US Treasurys less desirable, causing yields to rise? Or will market disruptions cause a flight to safety and send TIPS yields plummeting?
My expectation is that yes, the Fed will finally raise short-term rates later this year. It has given that signal multiple times. But unless inflation begins rising dramatically, the Fed move will be token. Rates won’t rise by much.
A final thing to remember: This 10-year TIPS will reopen at auction in September and November, giving investors two more shots to jump aboard. At this point, I probably won’t be a buyer, but things might change in the next few days.
Here’s a look at all 9- to 10-year TIPS auctions going back to January 2010: