10-year TIPS reopening auctions with a real yield of 0.664%

Here’s the announcement from the US Treasury.

This was the reopening of CUSIP 912828XL9, creating a 9-year, 8-month TIPS with a coupon rate of 0.375%. The resulting real yield to maturity was 0.664%, just barely beating a couple of 2014 auctions to become the highest yield for any 9- to 10-year TIPS auction since May 2011.

Because the yield was higher than the coupon rate, this TIPS auctioned with an adjusted price of $97.64 for $100.34 of value. The adjusted price includes inflation increases since the original auction in July.

Inflation breakeven rate. This 10-year TIPS ended up closing the day with a real yield of 0.65%, compared to a 2.25% yield on a nominal 10-year Treasury. That creates an inflation breakeven rate of 1.60%, which is a bit higher than the norm in recent weeks, indicating that demand is rising for TIPS versus nominal Treasurys. But it is still solidly in the ‘cheap’ range, meaning it is a good buy versus a nominal. If inflation averages more than 1.6% over the next 10 years, this TIPS will outperform the nominal 10-year.

This 5-day chart of the TIP ETF versus IEI (intermediate Treasurys) shows how TIPS have surged against nominal Treasurys. That wasn’t a favorable trend for buyers at today’s auction:

5day

I wasn’t a buyer at today’s auction, although I was watching it with a lot of interest. If the yield looked like it would climb above 0.75%, I might have taken a bite. But I ended up sitting this one out.

December will bring the last TIPS auction of the year, the reopening of a 5-year TIPS on Dec. 17. The current yield of about 0.35% is pretty attractive for a 4-year, 4-month investment. But that yield is pricing in some potential deflation in the near term. It will be one to watch.

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