The Treasury just announced that a new 10-year Treasury Inflation-Protected Security auctioned today with a coupon rate of 0.375% and a real yield (after inflation) to maturity of 0.491%. This is CUSIP 912828XL9 and it matures July 15, 2025.
Because the auction yield dipped below 0.5%, the Treasury pegged the coupon rate on this TIPS to the next 1/8 percentage point below, explaining the 0.375% number. Therefore, investors bought it at a discount – an unadjusted price of $98.87 per $100 of par value. After an inflation index of 1.00262 is added in, the adjusted price rises to $99.13 for about $100.26 of adjusted value on the issue date of July 31.
Today’s yield was slightly lower than the market was indicating yesterday, but this was still the highest yield for any 9- to 10-year TIPS auction since November 2014.
Inflation-breakeven rate. A nominal 10-year Treasury is trading today with a yield of 2.29%, setting up an inflation-breakeven rate of 1.79%, which remains solidly in the ‘cheap’ range for a 10-year TIPS. This means if inflation averages more than 1.79% over the next 10 years, this TIPS will outperform a traditional Treasury.
Here is a chart of 10-year TIPS breakevens going back to May 2009:
Reaction to the auction. The TIP ETF – which holds a broad range of maturities – had been wobbling most of the morning, first down and then up slightly as the auction approached. After the auction close at 1 p.m., it continued trading slightly higher, indicating lower yields. Overall, the reaction is muted, indicating a well-received auction.