This is CUSIP 912828K33, a 4-year, 4-month TIPS, the shortest term you can buy at an auction. This TIPS was originally created April 23, 2015, with a coupon rate of 0.125% and a real yield to maturity of -0.335%. In my preview article for that April auction, I noted the likely negative yield and said, ‘small investors will pass and look for better alternatives.’

But a lot has happened in eight months, and this ugly duckling TIPS has turned into something a lot more attractive. The real yield (after inflation) for this TIPS on the secondary market is up about 63 basis points since the original auction.

• Bloomberg’s Current Yields page shows it trading today with a yield to maturity of 0.39% and a price of about $98.91 for $100 of value.
• The Wall Street Journal’s Closing Prices page shows this TIPS – which matures in April 2020 – closed yesterday with a yield of 0.33% and a price around $99.
• The Treasury’s Real Yields Curve page estimates that a full-term 5-year TIPS would have yielded 0.43% at the close yesterday. (The yield on a full-term 5-year should be slightly higher than that of a 4-year, 4-month TIPS, so that explains the higher number.)

TIPS yields have been flattening out. The Treasury’s estimate of the 10-year yield is 0.69%, only 26 basis points higher than the 5-year. One factor is that the market expects a Fed-driven increase in short-term interest rates this month. The Federal Reserve’s announcement could come on the afternoon of Dec. 16 – just hours before this auction. And on Dec. 15, we’ll get the November inflation report. It’s going to be a very interesting week.

Another reason for the flattening yield curve is the expectation for continuing low inflation – or even mild deflation – in the near term. Deflation can cut into a TIPS’ return, especially in a reopening auction, where the buyer is purchasing additional, inflation-adjusted principal. This TIPS will have an inflation index of 1.01563 on the settlement date of Dec. 31. That means buyers will be purchasing about 1.5% of additional principal. Deflation in coming months could cut into that principal balance.

On the other hand, the effect of gas prices, which has been pulling inflation down over the last 12 months, it about to be neutralized, since year-over-year price drops will be much smaller in 2016. Take a look at this 5-year chart of US gas prices:

Unless gas prices fall dramatically lower in coming months – which seems unlikely – inflation will begin gaining ground. And if that happens, a 4-year, 4-month TIPS looks like a reasonable investment.

Since mid-2011 – when shorter-term TIPS yields began falling deeply negative – I have been recommending buying US Savings I Bonds over a 5-year TIPS. But right now, with a TIPS yielding about 0.4% above inflation, versus 0.1% for an I Bond, I think TIPS again have the advantage.

If this auction generates a yield of 0.4%, it would be highest yield for any 4- to 5-year TIPS at auction since April 2010 – more than five years.

Here is a chart of all 4- to 5-year TIPS auctions since 2007: