The Treasury will announce this tomorrow at 10 a.m., but we all know this will be the reopening of CUSIP 912810RL4, creating a 29-year, 4-month Treasury Inflation Protected Security. Because it has a established coupon rate of 0.75%, it is going to auction at a substantial discount. Here is the history of this TIPS:
- First auctioned Feb. 19, 2015, with a real yield of 0.842%. That set up the coupon rate of 0.750% – the coupon is always set at the 1/8% notch below the yield set at auction. And so it sold at a price of about $97.93 for $100 of value. (This shows how even a minor interest rate adjustment causes a big swing in price for a 30-year Treasury.)
- It was reopened June 18, 2015, with a real yield of 1.142%, 30 basis points higher. That resulted in an adjusted price of $90.59 for about $100.47 of value (figuring in accrued inflation). The unadjusted price was $90.17, meaning this TIPS lost almost 8% of its value in four months.
Where does it stand today? Because this TIPS trades on the secondary market, we can get a good estimate of its current value, one week ahead of the auction.
- Bloomberg’s Current Yields page shows that this TIPS is trading with a real yield of 1.17%, not too far off that June number. The price is quoted at $89.34 for $100 of value.
- The Wall Street Journal’s Closing Prices page shows this TIPS – which matures 2045 Feb 15 – closed today with a yield of 1.174% and an asked priced of about $89.50.
- The Treasury’s Real Yields Curve page estimates that a full-term 30-year TIPS closed today with a real yield to maturity of 1.19%. This is in line with the other numbers, since a full-term TIPS should yield higher than one maturing 8 months earlier.
The inflation adjustment. Keep in mind that this TIPS will have an inflation index of 1.01213% on Oct. 30, the settlement date. That means investors will be buying an extra 1.2% of inflation adjustment, and that will raise the cost. The auctioned yield remains the same, you will just buy a little extra principal.
Prospects. I recommend buying TIPS and holding them to maturity, so if a 30-year TIPS fits into your expected lifespan, this TIPS could be interesting. The coupon rate of 0.750% will mean you won’t be collecting much in cash payments, however. This TIPS is probably best suited to a tax-deferred account.
If you are buying as a trader, you can see that a 30-year TIPS is a very volatile investment. Do you think long-term interest rates are peaking? Then this is a buy. If you think they will rise higher, hold off and look at the next 30-year auction, in February 2016.
Here is the history of all 29- to 30-year TIPS auctions: