Wisconsin

I was vacationing in peaceful Wisconsin last week and the Treasury’s awfully early and rather strange auction announcement slipped right past me. These usually come around the 15th of the month, but not this time. No, the Treasury wants to pile a TIPS auction right after the Federal Reserve meeting this week – a meeting where the Fed could decide to raise short-term interest rates (very gently, I am sure, if at all).

Note the weirdness. The Fed decision will come Thursday afternoon. Normally, TIPS auctions close at 1 p.m. on Thursdays, but not this time. This auction will be Friday, Sept. 18, and will close at noon. Non-competitive bids must be placed by 11 a.m. Friday.

This is CUSIP 912828XL9, which originally auctioned on July 23 with a coupon rate of 0.375% and a real yield to maturity of 0.491%. Friday’s auction will create a 9-year, 10-month Treasury Inflation-Protected Security.

Friday’s auction is going to be very interesting. This TIPS is going to go off at a discount, but how much? Things are going to be volatile. We are going to get an August inflation report on Wednesday (the consensus is for 0.0%) and then a Fed decision Thursday.

Here is where things stand right now:

• Because this TIPS trades on the secondary market, you can check real-time quotes at Bloomberg’s Current Yields page. At 5 p.m. Tuesday, Bloomberg is showing a real yield to maturity of 0.70% and a price of about $96.87 for $100 of par value.
• The Wall Street Journal’s Closing Prices page shows that this TIPS closed Tuesday with a yield of 0.693% and a bid price of about $96.69 for $100 of value.
• The Treasury’s Real Yields Curve page estimates a full-term 10-year TIPS would have closed Tuesday with a yield to maturity of 0.72%, very close to the Bloomberg number.

If this TIPS auctions with a real yield above 0.70%, it would be the first 9- to 10-year TIPS auction to close that high since May 2011. There have been 25 auctions since then!

TIPS yields have been rising steadily in the last few weeks, and the TIP ETF has been feeling the pain (prices drop when yields rise). It closed today at $110.06, down 0.6% for the day and about 2.2% in the last 90 days. Demand for TIPS appears weak as we head toward Friday’s auction. You can see the trend in this three-month chart, which compares the TIP ETF in blue, versus the IEI (intermediate Treasury ETF) in red. TIPS have suffered while intermediate Treasurys have barely budged:

TIPS versus nominal Treasurys. With a nominal 10-year Treasury closing today at
2.28% and a 10-year TIPS at 0.72%, you get an inflation breakeven rate of 1.56%, which I consider very attractive. In this chart, you can see breakeven rates hitting lows for the last five years:

Conclusion. Amid all this chaos, a very attractive TIPS auction could be setting up for Friday. If yields hold above 0.7%, demand might return to the TIPS market. People who follow this blog know that I have said many times that the TIP ETF dropping to below $110 would mark a possible ‘buy’ for TIPS and TIPS mutual funds. We are getting very close.

Until then, study this chart of all 9- to 10-year TIPS auctions. I’ll be posting on Friday with a pre-auction update and then after noon, the auction results.