Auction result: 5-year TIPS reopens with a yield of 0.305%

The US Treasury just announced that its reopening of CUSIP 912828K33 resulted in a real yield to maturity (after inflation) of 0.305%. This creates a 4-year, 8-month Treasury Inflation-Protected Security.

Because this TIPS has an already-established coupon rate of 0.125%, investors today got it at a discount – an adjusted price of $99.17 per $100 of par value. However, because this TIPS carries about 1.9% of inflation appreciation since April, its adjusted price rises to $101.05 for about $101.90 of adjusted value.

The real yield of 0.305% was a huge jump – 64 basis points – over the April 23 original auction for this TIPS, which resulted in a yield of -0.335%. Today’s result was the second-highest yield in the last 14 4- to 5-year TIPS auctions, dating back to October 2010.

Short-term interest rates have been rising recently as the market adjusts to expected short-term rate increases from the Federal Reserve. It’s interesting to note that a 10-year TIPS is trading around 0.50% today, less than 20 basis points higher than a 5-year.

Inflation breakeven rate. With the nominal 5-year Treasury trading today at 1.47%, this sets up a ‘5-year’ inflation breakeven rate of 1.16%. That is remarkably low and indicates that the market expects continued very weak inflation. It also makes this TIPS very cheap against a nominal Treasury. Here is the trend for the 5-year breakeven over the last five years:

5-year breakevenreactionReaction to the auction. The TIP ETF had been trading down (slightly) all morning but took a very large move up after the auction closed, indicating declining yields. In fact, Bloomberg’s Current Yields page is showing this same TIPS currently trading at 0.27%, lower than the auction yield.

That’s a pretty strong statement in reaction to the auction, but what’s the message? Not sure, but I would say this auction was quite friendly to today’s buyers.

Reuters’ Richard Leong noted very strong demand for this 5-year TIPS reopening, which set a record high of 76.36% sales to indirect bidders, such as fund managers and foreign central banks.

TD Securities interest rate strategist Gennadiy Goldberg assigned an “A+” grade to the TIPS auction in a note, “suggesting that the recent selloff managed to attract some end-user demand.”

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