One day after weak auction demand, 30-year TIPS yield climbs above zero

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.

About Tipswatch

Author of Tipswatch.com blog, David Enna is a long-time journalist based in Charlotte, N.C. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website.
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6 Responses to One day after weak auction demand, 30-year TIPS yield climbs above zero

  1. Thomas says:

    Thanks for the New York Fed link. I am also an equity investor. Financial news networks have been excited of late because the 10-year Treasury has risen several tenths of a point from its historical low. That betrays some alarm for the equity market. How much alarm? I noted that the central bank has caused interest rates to drop. The yield curve is really flatter than it looks. For that matter, the two “yield inversions” from 2019 might have been a phantom.

    The central bank is manipulating everything. They are also buying corporate notes, so the “risk premium” calculation is “skewed”.

    For even more fun, the Bank of Japan has been buying equities as an advanced-QE.

    So what are we “retail investors” supposed to do? The expression for the effect that the central banks is forcing on us is referred to as “financial repression”. It’s a strong term, but the effect means that our inflation adjusted gain is about zero. Then we have to pay taxes on the “interest” that is kicked out from our financial products. It forces us savers to buy shares of corporations so that they make capital investments which stimulate durable goods spending and infrastructure spending.

    As retail investors, we have a few advantages over the professional technicians who have huge research capabilities:
    1. We only need to produce results during our lifetimes. College endowments must produce forever. Mutual funds must produce good gains else the investors leave them.
    2. We can take advantage of social security pension inflation adjustments. We can buy products like I-bonds. We can buy products like TIPS that protect us from inflation risk. That is the thesis of writers Zvi Bodie and Laurence Kotlikoff.

    I have a few other notions about inflation that I would like to share. Be well.

  2. Tipswatch says:

    @xinuflux, Yes, if inflation spikes, then you’ll be protected if you have TIPS or I Bond investments. It’s hard to say we’d ever by “happy” about inflation, but this is why we buy TIPS. Laddering 10-year TIPS is my preferred way of investing in TIPS. But don’t forget about I Bonds, up to the purchase limit each year. They have a 80-basis-point advantage over a 10-year TIPS, plus earn tax deferred interest and have better deflation protection.

  3. Thomas says:

    Your “scaling back” blog post reminded me that there is a lot to explore about inflation and financial products. Maybe start a new thread here to iterate some impressions?
    I heard that the Federal Reserve was buying TIPS. Since they are literally bidding against us retail consumers, we lose some of our inflation risk protection because we have to bid higher. At the moment when the Fed started buying TIPS, the inflation breakeven differential is forever changed. We cannot track trends and surmise the wisdom of the broad market. Then the Fed started buying commercial paper, which now distorts the risk adjusted premium for corporate/treasury debt.

    • Tipswatch says:

      Thomas, yes, the Fed is openly manipulating the Treasury market, and really the overall bond market. This isn’t a secret or conspiracy theory, it is the transparent policy of the Fed. It holds short-term rates at near zero, and keeps longer-term rates ‘under control’ by making purchases. For example, on Feb. 23, the Fed will purchase $2.4 billion in 1 to 7.5 year TIPS. See the schedule: https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/treasury-securities/treasury-securities-operational-details#current-schedule

      These Fed actions hold down both nominal and real interest rates, but it is allowing nominal rates to creep up and real yields have also been slowly climbing. It’s unfortunate for people (like me) who would like to be net buyers of TIPS, replacing them as they mature and then buying more. Right now I am just using maturing issues to buy I Bonds up to the limit, and then looking elsewhere for lousy nominal investments (short-term bank CDs, for example).

      • xinuflux says:

        If inflations spikes as expected isn’t it worth “paying” 1% for a 10y in order to not lose 4-20% to inflation? I’m thinking of laddering 10y TIPS in my IRA just to avoid that type of catastrophe which would prevent me from retiring.

  4. Ladder Up says:

    Not bad. It effectively turned into a 30-year I-bond, if such things existed! Let’s hope real yields improve on the 10 year TIPs.

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