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:
Treasury Inflation-Protected Securities 
That’s correct. The worse scenario is the real yields go up which I doubt will happen, and so what I’ll just hold for 30 years. I thought this issue was a good buy and I fell I should be able to profit once the market goes down a bit and people dump money into the bond market dropping the real yields.
Thanks for the explanation — I hadn’t really looked at it that way before, and I like the win either way perspective. 30 years is a long time admittedly, but I tend to agree that the risk of real yields going up a lot is pretty remote at this point. Moreover, if the Fed does move toward NGDP targeting, which seems increasingly likely, I would expect to see both lower real yields and more inflation, which is very good for TIPS.
MGK, if we faced a very dire 30 years, then the traditional 30-year would definitely be preferable. But if you are a trader, you could buy this TIPS with the expectation that QE4 would cause a boom in TIPS, as other QEs have done in the past.
Got it. Thanks!
There’s two scenarios. The real yields rise, which I doubt, and I just have to hold this thing for 30 years, which is okay for me.
With yellen talking about negative interest rates the realy yield would drop. Great I’ll make a gain in short term capitol gains and the value of my bond goes up. This scenario will happen once the stock market drops. Also people will sell the stock and buy bonds which will increase the price of the bonds and drop the yield price.
So yes I speculate on this stuff and I win either way.
If you see a deflation/recession scenario, wouldn’t you prefer the regular 30 year?
saw the real yield is 1.16% this morning. I did buy some so we will see. And yes I am betting on recession and deflation so I think this one is a good short term bet.
The scuttlebutt I hear is that the big money guys are using inflation swaps for the breakeven trade. TIPS are pretty much out of favor for them, due to the relative illiquidity vis a vis the Bond. So, I see really weak demand for this. Still, I agree it looks like a bad deal for me.