By David Enna, Tipswatch.com
The U.S. Treasury’s auction of $9 billion in a new 30-year Treasury Inflation Protected Security, CUSIP 912810SV1, ended with a real yield to maturity of -0.04%, a bit higher than expected and a possible indication of weak demand for this issue.
The Treasury’s real yield estimate for a 30-year TIPS closed Wednesday at -0.11%, 7 basis points lower than this auction result. And just two hours before the auction close, a similar TIPS (29 years to maturity) was trading on the secondary market with a real yield of -0.10%. That yield has since increased to -0.06%. The bid-to-cover ratio for this auction was 2.31, also an indication of lukewarm demand.
Since the beginning of the year, real yields for this term of TIPS have risen more than 30 basis points, from -0.39% on January 4 to -0.04% at today’s auction.
A TIPS is an investment that pays a coupon rate well below that of other Treasury investments of the same term. But with a TIPS, the principal balance adjusts each month (usually up, but sometimes down) to match the current U.S. inflation rate. So, the “real yield to maturity” of a TIPS indicates how much an investor will earn above (or below) inflation.
The Treasury set the coupon rate for CUSIP 912810SV1 at 0.125%, the lowest it will go for any TIPS. That is the lowest coupon rate in history for any 30-year TIPS. But it also means investors at today’s auction had to pay a premium for the higher-than-yield coupon rate, with an adjusted price of about $105.01 for about $100.08 of value, after accrued interest and inflation are added in. This TIPS has a settlement date of Feb. 26, 2021, when it will have an inflation index of 1.00037.
Here is the trend in the 30-year real yield over the last 12 months, showing the deep dive in yield after the pandemic outbreak in March 2020, and the gradual rise higher, which has accelerated in 2021:
Inflation breakeven rate
With a nominal 30-year Treasury bond now trading with a yield of 2.07%, this TIPS gets an inflation breakeven rate of 2.11%, which is in line with expectations. That means CUSIP 912810SV1 will outperform a nominal 30-year Treasury if inflation averages higher than 2.11% over the next 30 years.
Last year on Feb. 20, 2020, an identical 30-year TIPS auctioned with an inflation breakeven rate of 1.71% and reopened at auction on Aug. 20 with a breakeven rate of 1.65%. Inflation expectations are rising, and that makes this new TIPS more expensive versus a nominal Treasury. That could be one reason for the apparent lukewarm reaction to today’s auction. But 2.11% was still in line with 2018 auctions of this term.
Here is the trend in the 30-year inflation breakeven rate over the last year, showing the steady rise higher since the depths of pandemic-induced market turmoil in March 2020:
It ended up that this new TIPS didn’t even come close to breaking the record for low yield for any 29- to 30-year TIPS at auction, -0.272%, set on Aug 20, 2020. But it is only the second 30-year TIPS auction in history to result in a negative real yield.
The TIP ETF had been trading lower all morning (indicating slightly higher yields) and then dipped lower again right after this auctions close at 1 p.m. EST. So the higher-than-expected yield came as a slight jolt to market, and indicates demand was not strong for a 30-year TIPS with a real yield negative to inflation.
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he recommends can purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.