Up next: 10-year TIPS reopens at auction Nov. 19, 2015

The US Treasury just announced that it will reopen CUSIP 912828XL9 at auction on Nov. 19, creating a 9-year, 8-month Treasury Inflation-Protected Security. This TIPS, which first auctioned on July 23, carries a coupon rate of 0.375%.

It will be going off at a discount, because yields on 10-year TIPS have risen a bit in recent months. Here is what we know from the secondary-market trading in CUSIP 912828XL9:

  • Bloomberg’s Current Yields page shows it trading this morning with a real yield to maturity of 0.76% and a price of about $96.39 for $100 of value.
  • The Wall Street Journal’s Closing Prices page shows that this TIPS – which matures 2025 Jul 15 – closed yesterday with a real yield of 0.725% and an ask price of about $96.75 per $100.
  • The Treasury’s Real Yields Curve page estimates that a full-term 10-year TIPS would have closed yesterday with a yield of 0.77%.

Those numbers indicate that – a week out from the auction – this TIPS is yielding around 0.765%, plus inflation, resulting in a cost of around $96.50 for $100 of a value. But a lot can happen in a week. If you are interested in this TIPS, you should watch the three links above to judge its current value as Nov. 19 approaches.

Also, note that this TIPS will carry an inflation index of 1.00343 at the settlement date – Nov. 30. That will slightly increase an investor’s cost, but also slightly increase the principal purchased, since the TIPS will carry accrued inflation.

Yield milestone? If the yield of 0.75% holds through the auction, this TIPS will have the highest yield resulting from any 9- to 10-year auction since May 2011. That’s more than four years. I suspect there will be a lot of interest in this auction.

Inflation breakeven rate. A nominal 10-year Treasury is trading today with a yield of 2.32%, creating an inflation breakeven rate of 1.57% if this TIPS goes off at 0.75%. I consider this ultra low. It means this TIPS will outperform a nominal Treasury if inflation averages more than 1.57% over the next 10 years.

Investors are pricing in very low inflation, as shown in this chart, which tracks the 10-year inflation breakeven rate over the last five years:

fred

You can see how rarely implied inflation drops below 1.6%. TIPS are a good buy when that happens, at least versus a nominal Treasury.

Here’s a chart of every 9- to 10-year TIPS auction since January 2009, showing the huge dip in yield beginning in mid-2011, then gradually reversing in 2013 and beyond.

10-year TIPS

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4 Responses to Up next: 10-year TIPS reopens at auction Nov. 19, 2015

  1. maynardGkeynes says:

    If the 10 year suits your time horizon, I agree it’s interesting. But, just for perspective, the breakeven on the 30 is about 1.8% now. Both are mighty cheap insurance at this point…but I can’t help favoring the 30 better as the better deal now, assuming one has long term funding needs, because (1) for the next few years,the risk of a major bout of inflation is pretty low, so u are really getting maybe 7 years of inflation protection with this; (2) the risk of major inflation, which is what I most worry about, increases substantially over a longer time horizon, which favors the 30; (3) the real interest rate of 1.3% on the 30 is actually pretty good right now by historical standards (even before the financial crisis, it was down to less than 1.8%); (4) I’m concerned about reinvestment risk on the 10. But, as I say, it depends on one’s situation, age, etc.

  2. Random Pointer says:

    How is this offering compared to I-Bonds? I-Bonds yield is 1.64%

  3. tipswatch says:

    Random, I Bonds pay 0.1% above inflation. The current yield results from 1.54% inflation (annualized) over the March to September period. This 10-year TIPS will pay 0.75% (approximately) above inflation. So just by that factor, the TIPS outperforms. However, the I Bond has a flexible maturity date and income is tax deferred.

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