New 10-year TIPS auctions with a real yield of 0.725%, highest in nearly 5 years

The Treasury’s reporting tools were down at 1 p.m., but reader Ron came through with a link to the auction report. And now the tools are back up! Anyway …

A new 10-year Treasury Inflation-Protected Security – CUSIP 912828N71 – auctioned today with a real yield (after inflation) to maturity of 0.725%, the highest yield for any 9- to 10-year TIPS auction since May 2011.

The coupon rate was set at 0.625%, meaning investors are getting this TIPS at a discount, an adjusted price of about $98.95 for $100 of par value. Part of that adjustment was due to the fact that this TIPS will have an inflation index of 0.99905 on the Jan. 29 closing date. In other words, a buyer of $10,000 will have $9,905 on the settlement date.

Inflation breakeven rate. With a nominal 10-year Treasury trading right now at 2.03%, this TIPS gets an inflation breakeven rate of an ultra-low 1.30%. That means if inflation averages more than 1.3% over the next 10 years, this TIPS will outperform a nominal Treasury. That’s astounding, and indicates 1) the market is pricing in extremely low inflation over the long term, or 2) the market is adjusting to the idea of a near-term recession. Here are breakeven rates over the last six years:

10-year inflation breakevenTIP ETFReaction to the auction. Today’s yield was much higher than I expected, by at least 8 basis points, based on market data from earlier Thursday. That thinking is backed up by the market’s reaction immediately after the auction: The TIP ETF fell sharply, indicating higher yields.

From the Reuters report:

U.S. Treasuries prices extended their earlier drop on Thursday after weak investor demand at a $15 billion auction of 10-year Treasury Inflation Protected Securities resulted in their highest yield since May 2011.

After watching TIPS auctions for 5 years, I can say ‘always be ready for surprises.’ Today I got a pleasant one.

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3 Responses to New 10-year TIPS auctions with a real yield of 0.725%, highest in nearly 5 years

  1. JEFFREY SCHENKEL says:

    Thanks for the nice reporting, but I think you made a typo in translating the inflation index of 0.99905 (three nines) into a settlement date value. I think this should be $9,990.50 (three nines). This will be roughly $10 below “par”, not $100.

  2. Len says:

    Yes, a pleasant surprise considering the debacle in the stock market as well. I took some. And I know I have suggested this before, but you might consider including current CD rates in your comparisons (ten year FDIC insured CD= 2.85% vs. 2,03 for the note) since Treasuries are largely the playground of the big players. Theoretically the Treasuries may be “safer” but I find that a difference without distinction myself. Thanks for all your work!

  3. maynardGkeynes says:

    @ Len — on the 10yr CD @ 2.85% — is that a brokered CD?

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