Up next: 5-year TIPS reopens at auction Aug. 20, 2015

The US Treasury will announce later this morning that it is reopening CUSIP 912828K33 at auction next Thursday, creating a 4-year, 8-month Treasury Inflation-Protected security with a coupon rate of 0.125%.

The real yield (after inflation) will be set at the auction, but here is what we can say right now about this TIPS, which trades on the secondary market:

  • The Wall Street Journal’s Closing Prices page shows it ended Wednesday with a real yield to maturity of 0.147% and a price of about $99.91 per $100 of current value. But the listing also showed a very wide bid and asked spread of about 30 cents.
  • The real time quote this morning from Bloomberg’s Government Bonds page shows it yielding 0.24%, a pretty wide spread from yesterday’s close. The price at that yield is down to $99.43.
  • The Treasury’s Real Yields Curve page estimates that a full-term 5-year TIPS would yield 0.25%, more in line with the Bloomberg number.

NOTE: This TIPS will have an index ratio of 1.01892 on Aug. 31, so investors will be buying about 1.9% of accrued principal at this auction. That will push the adjusted price higher.

Yields on 5-year TIPS have been all over the map this year, starting the year at 0.31%, reaching a high of 0.34% as recently as Aug. 5, and a low of -0.37% on April 27, just a few days after this TIPS first auctioned with a miserable yield of -0.335%.

So … It’s possible that in just four months, the yield on this TIPS will have risen more than 60 basis points. And its cost will have dropped from $102.52 at the original auction to somewhere around $99.43.

It’s certainly a lot more attractive this time around.

Inflation breakeven rate. With the 5-year Treasury currently yielding about 1.56%, this sets up an inflation breakeven rate of 1.32% for this TIPS, meaning that it will outperform a 5-year nominal Treasury if inflation averages more than 1.32% over the next 5 years.

Although inflation has been running at 0.1% over the last 12 months, it has been climbing in recent months. This trend could be reversed by recently falling gasoline prices, but an inflation breakeven rate of 1.32% looks very attractive historically, as this chart shows:

5-year breakevenAlternatives. The 5-year term sets up good comparisons with other ultra-safe investments. For example, this TIPS’ yield of 0.24% above inflation beats the current I Bond offering, which matches inflation. Another alternative is 5-year insured bank CDs, which are paying  2.25% right now at several banks. The 2.25% return sets up an inflation breakeven rate of 2.01% for this TIPS. If you don’t believe inflation will average higher than 2.01% over the next 5 years, the bank CD might be a better investment.

It will be interesting to watch where rates head in the next week. If you have need to park money for 4 years, 8 months, this TIPS could be an interesting investment.

Here is a chart of all 4- to 5-year TIPS auctions since 2007. Note that a yield of 0.24% would be the second highest for any 4- to 5-year TIPS since April 2010:

5-year TIPS

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