30-year TIPS reopening auctions with a yield of 1.20%

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.

30- year


About Tipswatch

Author of Tipswatch.com blog, David Enna is a long-time journalist based in Charlotte, N.C. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website.
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5 Responses to 30-year TIPS reopening auctions with a yield of 1.20%

  1. Len says:

    Seems like pretty thin gruel? Consider this, the return on Vanguard’s S&P 500 index fund (VFINX) from 1 January 2000 thru 31 December 2014 (15 years) was a whopping 2.2% average annually. Unfortunately the CPI (CPI-U) shows an annual average inflation for this period of…. 2.17%. Gives new meaning to the phrase “stocks for the long run” I suppose.

    • maynardGkeynes says:

      Bob Shiller’s research shows that the percentage of investors who agree with the statement “over the long run, stocks will always out-perform bonds” (not an exact quote) is shockingly high — something like 96%. You can’t get 96% of the people to agree that the Earth is round. So, something is going on here that is very strange.

      • Len says:

        I would venture a large mass of Boomers who haven’t the wealth to retire in the style they had hoped for. In other words…. wishful thinking. But then, as Peter lynch once pointed out, most do more research in buying a refrigerator than evaluating their investments.

  2. maynardGkeynes says:

    Demand was pretty strong for this. Bid to cover ratio was the highest since Feb 2014. Unfortunately, the yields slipped a bit after Draghi’s news conference. If this had been earlier in the week, it would have printed closer 1.3%. But this is a good auction for long term TIPS holders, no complaints.

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