Sorry for the delay — it’s been quite the day. Meeting after meeting, all afternoon. And so, what happened at the 1 p.m. close of today’s TIPS auction?
CUSIP 912810RL4 auctioned with a real yield (after inflation) to maturity of 1.20%. This is a 29-year, 4-month Treasury Inflation-Protected Security with a coupon rate of 0.75%. In addition to that coupon, the TIPS’ principal balance will grow at the rate of inflation.
Because the auctioned yield was much higher than the coupon rate, this TIPS was sold at an unadjusted price of $88.91 for $100 of value. The adjusted price – what buyers actually paid – was higher because this TIPS has will have an inflation index of 1.01213 on the Oct. 30 closing date. That means buyers will actually pay about $89.99 for $101.21 of inflation-adjusted value.
The yield ended up being slightly higher than the result of the last reopening of this TIPS, on June 18. That auction resulted in a yield to maturity of 1.142%.
Inflation breakeven rate. A 30-year nominal Treasury is currently trading with a yield of 2.86%, meaning this TIPS has an inflation breakeven rate of 1.66%. That is awesomely low and puts this TIPS in the ‘ultra-cheap’ range. If inflation averages higher than 1.66% over the next 29 years, this TIPS will outperform a nominal Treasury.
Take a look at this chart showing CPI-U since 1961, and you’ll see that the lowest 30-year average is 2.7%, for the 30 years than ended in June 2015. Here is the trend over the last five years for the 30-year breakeven. Note that at times (during quantitative easing, which raised inflation fears) it was approaching 2.8%. Now inflation fears are sidelined, making this TIPS a strong investment for those who can take the long maturity and high volatility.