A reopening auction today of a 5-year TIPS generated a real yield of 0.472%, the highest for any 4- to 5- year TIPS auction since April 2010. This is CUSIP 912828K33, with a coupon rate of 0.125% and a maturity date of April 15, 2020.
Because the yield was much higher than the coupon rate, this Treasury Inflation-Protected Security auctioned at a discount – the unadjusted price was $98.53 for $100 of value. After accrued inflation-adjusted principal was added in, the adjusted price became about $100.07 for $101.56 of principal.
In other words, if you bought $10,000 of this TIPS at this auction, you paid $10,070 for $10,156 in principal and will earn 0.125% on that principal going forward. The principal will rise and fall with inflation until maturity.
This TIPS has an interesting story, since it originally auctioned in April with a yield to maturity of -0.335%. Buyers at that auction paid $102.52 for $100 of value. That means this TIPS has dropped almost 4% in value since the original auction – a big drop for a 5-year maturity. But it also means buyers today got a good price.
Inflation breakeven rate. A nominal 5-year Treasury is trading right now with a yield of 1.72%, setting up an inflation breakeven rate of 1.25% for this TIPS. If inflation averages more than 1.25% over until April 2020, this TIPS will outperform the nominal Treasury. This rate is very low, indicating the TIPS was ‘cheap’ versus a traditional Treasury.
Reaction to the auction. The TIP ETF has been trading up slightly all morning, and it hasn’t budged with the close of this auction at 1 p.m. That indicates all went as expected.