The ‘bond bubble’ didn’t burst in 2015, but it did fizzle a little. Vanguard’s Total Bond Market ETF (BND) started the year at $82.65 and ended at $80.76, a decline of 2.3%. But when you add in dividends the fund paid, it eked out a tiny positive return for the year.
TIPS didn’t fare as well, as inflation breakeven rates fell to extremely low levels against traditional Treasurys. That indicates investors are shunning TIPS, causing yields to rise. The broadly diversified TIPS ETF (TIP) started the year at $112.73 and ended at $109.68, a decline of 2.7%. The fund’s total return after distributions was -1.75%.
At the end of the year, the TIP ETF finally fell below the $110 level, which I have been predicting would be a positive indicator for buy-and-hold-to-maturity TIPS investors. It was as high as $123.15 in December 2012.
What does it mean? The TIPS market is a lot more attractive going into 2016 than it has been for nearly five years. Here’s a rundown of all the TIPS auctions of 2015:
CUSIP 912828H45: 10-year TIPS
First auction, Jan. 22: Auctioned with a yield to maturity (after inflation) of 0.315% and a coupon rate of 0.250%. The inflation breakeven rate was 1.57%.
Reopened, March 19: Auctioned with a real yield to maturity of 0.2%, the lowest yield for an 9- to 10-year TIPS at auction since May 2013. The inflation breakeven rate rose to 1.77%. The auction was a bit of a disappointment, coming one day after Fed chair Janet Yellen declared the Fed would move slowly on increasing short-term interest rates.
Reopened, May 21: Auctioned with a real yield to maturity of 0.358%. The inflation breakeven rate was 1.852%.
CUSIP 912810RL4: 30-year TIPS
First auction, Feb. 19: Auctioned with a coupon rate of 0.750% and a yield to maturity of 0.842%. This was the lowest yield for any 29- to 30-year TIPS auction since February 2013, and the yield of 0.842% was far below the previous year’s 30-year TIPS, which auctioned on Feb. 20, 2014, with a yield of 1.495% and a coupon rate of 1.375%. In my preview article on this auction, I cautioned against this auction, which I predicted could be a ‘time bomb.’
Reopened, June 18. Auctioned with a real yield to maturity of 1.142%. The unadjusted price was $90.16 for $100 of value, because the yield was much higher than the 0.750% coupon rate. This TIPS lost nearly 10% of its value in four months.
Reopened, Oct. 22. Auctioned with a real yield to maturity of 1.20% and an unadjusted price of $88.91 for $100 of value. The inflation breakeven rate was 1.66%, ultra-low for a 30-year issue.
CUSIP 912828K33, 5-year TIPS
First auction, April 23: Auctioned with a real yield to maturity of -0.335%. The coupon rate was set at 0.125%, the lowest the Treasury allows on a TIPS. This is the lowest yield for any 4- to 5-year TIPS at auction since Dec. 19, 2013. In my preview article, I suggested that investors ‘look for better alternatives.’
Reopened, Aug. 20: Auctioned with a real yield to maturity of 0.305%, a huge jump – 64 basis points – over the April 23 original auction. The unadjusted price was $99.17 for $100 of value and the inflation breakeven rate was a remarkably low 1.16%. In my preview article, I noted this auction was ‘a lot more attractive‘ than April’s. I was a buyer.
Reopened, Dec. 17: Auctioned with real yield of 0.472%, the highest for any 4- to 5- year TIPS auction since April 2010. The unadjusted price dropped to $98.52 for $100 of value and the inflation breakeven rate rose to 1.25%. I was a buyer.
CUSIP 912828XL9, 10-year TIPS
First auction, July 23: Auctioned with a coupon rate of 0.375% and a real yield to maturity of 0.491%. The unadjusted price was $98.87 per $100 of value, and the inflation-breakeven rate was 1.79%.
Reopened, Sept. 18: Auctioned with a real yield to maturity of 0.60% and an unadjusted price of $97.86 for $100 of value. The yield of 0.60% was the highest for any 9- to 10- year TIPS since an auction in September 2014. The inflation breakeven point dropped to 1.56%. I was a buyer.
Reopened, Nov. 19: Auctioned with a 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. The unadjusted price was $97.31 per $100, and the inflation breakeven rate was 1.60%.
The trend in inflation
‘Headline’ inflation has remained stubbornly low, held down by a collapse in gasoline prices in 2014. As of November, 12-month inflation was running at 0.5%, but core inflation – which strips out energy and food – has climbed to 2.0% over the last 12 moths. If energy prices rise or even stabilize, we could see higher headline inflation in 2016. Here is the trend over the last year: