By David Enna, Tipswatch.com
The Treasury’s offering of a new 30-year TIPS auctioned Thursday to weak demand, generating an above-current-market real yield of -0.04%, about 6 basis points more than expected. Then, one day later, the Treasury’s estimate of 30-year real yield broke above zero, to 0.03%, rising above zero for the first time since June 9, 2020.
Here is that trend over the last year, up to Thursday’s market close:
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.
TIPS real yields have been negative to inflation, across all maturities, for about 8 months, so this move on Friday is significant. Investors are seeking higher nominal and real yields, especially in the long maturities. The nominal yield for the traditional 30-year Treasury bond also has been climbing, from 1.66% on Jan. 4, 2021, to 2.14% at the market close on Friday.
The TIPS that auctioned Thursday, CUSIP 912810SV1, got a coupon rate of 0.125%, so investors had to pay a premium, an adjusted price of about $105.01, because the real yield was below the coupon rate. As of Friday’s market close, the price on the secondary market had dropped to $103.06, a fall of nearly 2% in a single day. This demonstrates the volatility of 30-year Treasury issues.
The next TIPS auction, on March 18, will be for a reopened 10-year TIPS, CUSIP 91282CBF7, but 10-year real yields remain well below zero. As of Friday’s close, this TIPS was trading with a real yield of -0.82%. The originating auction on Jan. 21 got a real yield of -0.987%, so 10-year real yields are also climbing.
This is from a Reuters report after the market close Friday:
“The bond market’s trying to reprice the fact that the Treasury is going to borrow more money to pay for the stimulus package,” said Tom di Galoma, a managing director at Seaport Global Holdings in New York. …
Meanwhile, the 30-year TIPS yield, which had been in negative territory since June, surpassed the 0% mark, rising after a weak auction of $9 billion of the securities on Thursday. …
“It’s hard to build a fundamental case for 30-year TIPS yields to be negative forever,” said Jim Vogel, senior rates strategist at FHN Financial in Memphis, Tennessee. “Over 30 years, that’s a lot of Fed accommodation for a long time.”
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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.