10-year TIPS auctions with a real yield of 0.491%

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:

Tips breakevensReaction 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.

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9 Responses to 10-year TIPS auctions with a real yield of 0.491%

  1. maynardGkeynes says:

    It’s arguably “cheap” relative to relative to the nominal 10-year T-bond, based on the breakeven rate you cite. Unfortunately, inflation is not the only risk on the horizon right now. The risk that worries me even more is a sharp rise in real rates, which TIPS do not protect against. Is it possible that “floaters” have replaced TIPS as the thinking man’s conservative investment? Do they even issue extended duration floaters? Would it be wise to hedge risk by owning both TIPS and floaters?

  2. tipswatch says:

    If interest rates rise, and inflation doesn’t, a TIPS holder would still earn 0.491% over inflation on today’s issue, if held to maturity. TIPS funds wouldn’t be pretty, though. I’d be interested in floaters if I could find a solid investment in them. I don’t like the Treasury offering, which pays miniscule interest with a 2-year commitment. This recent WSJ article was interesting, saying corporate floating rate offerings are on the wane:

    http://blogs.wsj.com/cfo/2015/07/20/the-morning-ledger-floating-rate-corporate-bonds-fall-from-favor/

  3. Len says:

    I’m going with 1/2 the TIPS and 1/2 a 10 year CD @ 3.15% because if interest rates rise, and you are re-investing the interest, you can be better off with the higher payout on the CD. Even in a marginal 15% federal tax bracket the TIPS can have a negative real return after taxes and inflation.

    • maynardGkeynes says:

      So can a 10 year CD @ 3.15% on a real purchasing power basis. Not seeing a loss does not make it go away. (See my comment below.)

  4. maynardGkeynes says:

    TIPS funds would not be pretty only because the the capital loss would be “recognized” immediately in the share price. Holding a TIPS to maturity may make one feel better, but the market/NPV loss is the same as that of a TIPS fund of equivalent duration. Just because you don’t sell the bond doesn’t change that. You still got screwed. There are a few wrinkles involving the tax consequences to holders of TIPS funds if there are a lot of bonehead redemptions when the price goes down, but inside an IRA/401K they are of no matter. I often see the distinction you are making cited as a reason to own the actual bonds instead of a a TIPS fund, but as far as I can tell, it is totally bogus. Maybe I am missing something? (Highly possible.)

    • tipswatch says:

      MGK, on the subject of marking to market bonds held to maturity: No, I don’t do it. I don’t recognize the temporary gains or losses along the way. This is because I have 100% certainty I will hold the investment to maturity, getting x,xxx dollars at that time. With TIPS, I track the current inflation-adjusted principal balance. At maturity, that’s what I’ll get. And so there is zero loss and zero gain from market moves.

      I’d say ‘traditional’ financial planners agree with my approach, but ‘deep-thinking’ financial planners would agree with you. I can light up the Bogleheads forum by talking about my approach. It drives deep thinkers crazy — and of course, all the points they make are correct. And so are mine, because both approaches are reasonable and correct.

      My asset allocation is about 40% stocks (mostly index funds), 30% fixed income funds (broad total market funds) and 30% insured, super-safe investments like CDs, TIPS held to maturity, EE and I Bonds. That 30% is pretty simple to track. No need to make it complicated, in my view.

  5. maynardGkeynes says:

    I guess a reasonable substitute for floaters is 6-month bills. But other than the TSP G fund (which is open only to federal employees and more recently to lower income savers), I can’t think of anything that protects against both real rate increases and that also allows you to get the term premium.

  6. tipswatch says:

    Another alternative, which I might need to use this year: 1-year bank CDs, which seem to often be priced above market to attract deposits. You can get 1.25% today at multiple locations, which is a lot more than the 0.14% of the six-month Treasury, or 0.32 of the 1-year Treasury.

  7. Pingback: Next up: 10-year TIPS reopens at auction Sept. 18, 2015 | Treasury Inflation-Protected Securities

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