The Treasury will auction a new 30-year Treasury Inflation-Protected Security – CUSIP 912810RR1 – next Thursday. The coupon rate and real yield to maturity (after inflation) will be determined at the auction.
Here’s what we can say today, a week away from the auction:
- The measure I trust the most for a new-issue TIPS is the Treasury’s Real Yields Curve Rates page, which updates every weekday with an estimate of the yield on a full-term TIPS. For a 30-year TIPS, this measure was set Wednesday at 1.06%. This is down 19 basis points from where it started the year.
- Bloomberg’s Current Yields page gives a real-time look at the trading for the most recent 30-year TIPS, which matures in 29 years. It is currently trading with a yield of 1.03%.
- And the Wall Street Journal’s Closing Prices page shows that 29-year TIPS, which matures in February 2045, closed Wednesday with a yield of 1.047%.
So at this point, a week from the auction, it looks like this new TIPS will auction with a yield of 1.06% and a coupon rate of 1.0%. Given those numbers, I’d have to say this one doesn’t look like a great deal for the buy-and-hold investor – especially if the 30-year lifespan falls outside your own likely lifespan.
For a buy-and-trader, 30-year TIPS are extremely volatile investments. The 30-year TIPS auctioned last February – CUSIP 912810RL4 – has lost about 8% of its market value in the last year. At the same time, its inflation index has climbed only 0.6%. Buying a new TIPS with a coupon rate of 1.0% as a buy-and-trade investment is a bet on recession, in my opinion.
On the positive side: The inflation breakeven rate. A nominal 30-year Treasury is trading right now with a yield of about 2.53%, setting up a very low inflation breakeven rate of 1.47% for this new 30-year TIPS. And that’s why this TIPS will have appeal for big-money investors. It inflation averages more than 1.47% over the next 30 years, the TIPS will outperform the nominal Treasury.
This chart shows just how dramatically low that breakeven rate is:
I’d argue that the very low breakeven rate builds in a ‘margin of safety’ for this TIPS, because if overall interest rates rise, its market yield could climb much more slowly than a traditional Treasury’s. For example, if the 30-year Treasury yield climbed to 4.0% – or about 147 basis points, the yield on a 30-year TIPS might rise to only 1.80%, or 74 basis points. That would set the inflation breakeven rate at a more normal 2.2%.
At any rate, this one doesn’t fit my purchasing profile, so I won’t be a buyer. A yield of 1.06% falls into the lower range of recent 29- to 30-year TIPS auctions, as you can see from this chart, showing all auctions of this term in history: