Checking in on Thursday’s 10-year TIPS reopening auction

The Federal Reserve this afternoon backed away from a short-term interest rate hike this month, but left the door open for a future increase, most likely in December. That was exactly what the market was expecting, so there’s shouldn’t be a big effect on tomorrow’s auction.

This is a reopening of CUSIP 912828S50, and the auction will create a 9-year, 10-month TIPS with a coupon rate of 0.125%. Non-competitive bids have to be placed by noon.

Here’s where the market stands Wednesday evening for this TIPS, which trades on the secondary market:

  • Bloomberg’s Current Yields page shows this TIPS trading with an after-inflation yield of 0.12% and a price of about $100.02 of value. Today’s yield to maturity is very close to this TIPS’ coupon rate.
  • The Wall Street Journal’s Closing Prices page shows this TIPS (which matures 2026 Jul 15) closed Wednesday with a real yield of 0.127% and a price of almost exactly $100 for $100 of value.
TIP ETF, Wednesday Sept 21

TIP ETF, Wednesday Sept 21

If you are thinking of investing in this TIPS, I advise waiting until about 10 a.m. Thursday morning, and then checking the trend of the TIP ETF. If the ETF’s price is rising sharply, expect a lower yield; and vice versa.

As the chart shows, the TIP ETF got a nice boost after the Federal Reserve’s interest rate announcement. A higher price means a lower real yield for investors. It’s never a nice thing when a product gets more expensive on the day before you are buying it.

Unless there’s a big market swing Thursday morning, it’s looking like this 9-year, 10-month TIPS will be getting a real yield right around the coupon rate of 0.125%.

I’d argue that the US Savings I Bond – with a fixed rate of 0.10% – is much more desirable than a 10-year TIPS with a real yield of 0.12%. The I Bond has a flexible maturity, tax-deferred interest and better deflation protection. In ‘normal’ times, a 10-year TIPS would have about a 75 basis point premium over an I Bond. Right now that premium has shrunk to about 5 to 10 basis points.

I’ll be posting the auction results after 1 p.m. on SeekingAlpha.com.

Read full versions of all my recent articles on SeekingAlpha

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