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:
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.