Coming July 21: Auction of a new 10-year TIPS

Summary

  • The coupon rate and real yield to maturity for CUSIP 912828S50 will be set by the auction.
  • The current market is pointing to a coupon rate of 0.125% and a real yield of about 0.03%.
  • Why would buyers be interested? TIPS are very cheap when compared to nominal Treasurys.

I just posted my analysis of the July 21 auction over at SeekingAlpha.com.

I don’t think this is going to be an attractive auction for the small investor, but big-money investors are going to be drawn in by currently very low inflation breakeven rate (1.45%) for a 10-year TIPS. That makes TIPS cheap versus nominal Treasurys.

Are you considering an investment? Read my analysis.

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One Response to Coming July 21: Auction of a new 10-year TIPS

  1. John Bugle says:

    I am concerned that the real yield on ten year TIPS is very low:

    https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield

    My IPS calls for fixed income to be split 50/50 nominal bonds/TIPS. This has been in effect for many years, implemented using Vanguard Total Bond (VBTLX) and Vanguard Inflation-Protected Securities (VAIPX) in retirement accounts. Rightly or wrongly, I am comfortable with this division of fixed income.

    Last year I started building a ladder of 10 year TIPS purchased in equal amounts in January and July, with the intent of building a ten year ladder, (planned retirement in or around 2025). The purpose of the ladder is twofold: to serve as a liability-matching portfolio and to protect against sequence-of-returns risk (ladder would be rolled or used for living expenses, depending on the condition on financial markets in the first 10 years of retirement).

    The ladder is essentially being funded by selling shares of VAIPX.

    With that background, I am looking for advice on the following questions:

    1) Since I am essentially transferring from one vehicle to another within the same asset class (TIPS fund to individual TIPS) does the prevailing price/real interest rate even matter?

    2) Rather than purchasing 10 year TIPS in July, should I continue to hold in VAIPX with the hope/expectation of better real rates later? I could fill the rung later with an auction purchase 5 year TIPS in 5 years (constraints of my retirement plan necessitate purchase at auction vs in secondary market).

    3) Any other recommended course of action, keeping in mind purposes of this ladder outlined above (LMP and sequence-of-returns protection)?

    Thanks!

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