By David Enna, Tipswatch.com
The U.S. Treasury’s $8 billion reopening auction today of CUSIP 912810SV1 generated a real yield to maturity of -0.292%, the lowest ever for any TIPS auction of this term.
The auction created a 29-year, 6-month Treasury Inflation-Protected Security, carrying a coupon rate of 0.125%, the lowest the Treasury will go for any TIPS. .
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.
Because the auction’s real yield to maturity was so far below the coupon rate of 0.125%, investors at Thursday’s auction had to pay a lofty premium over par for this TIPS. The adjusted price was about $117.72 for about $104.33 of value, after accrued inflation is added in.
This TIPS will carry an inflation index of 1.04326 on the settlement date of Aug. 31. That means investors paid an extra 4.3% above par, but will receive a matching amount of inflation adjustment. The unadjusted price — reflecting just the real yield versus coupon rate — was about $112.84 for $100 of par value.
Here is the trend in 30-year real yields over the last two years, showing the dramatic move lower in the wake of the Federal Reserve intervention beginning after the COVID-19 surge in March 2020 and continuing today:
Inflation breakeven rate
With a 30-year nominal Treasury yielding 1.88% this afternoon, this TIPS gets an inflation breakeven rate of 2.17%, which looks entirely reasonable. U.S. inflation over the last 30 years has averaged 2.3%, the lowest for any 30-year period beginning with 1971. So today’s breakeven number looks pretty attractive by historical standards.
Here is the trend over the last two years in the 30-year inflation breakeven rate, showing that inflation expectations have been leveling off after a surge higher through most of 2020 and into the spring of 2021:
Reaction to the auction
CUSIP 912810SV1 trades on the secondary market, and had been trading with a real yield to maturity of 0.30% through the morning. So the auction result looks just about right. Close enough, anyway. The TIP ETF — which holds the full range of maturities — took a bounce higher after the auction close, which indicates a positive reaction to the auction.
A 30-year TIPS is a unique investment with little appeal to small-scale investors. The Treasury reported that only $2.9 million — that’s million — of the $8 billion offering was sold through TreasuryDirect. In all, only $5.6 million was purchased through non-competitive bids, the only option open to small-scale investors.
The auction’s bid to cover ratio was 2.34, not stellar but acceptable.
For big-scale investors — like foreign central banks, hedge funds and pension funds — the relatively low inflation breakeven rate was enough to make this TIPS appealing, at least versus a 30-year nominal Treasury yielding 1.88%.
This auction closes the books on CUSIP 912810SV1, the only 30-year TIPS in history to get a coupon rate of 0.125%. Here the history of 29- to 30-year TIPS auctions from 2018 to 2021:
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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 discusses can purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
Hi David, Been reading your TIPS articles for quite some time; find them interesting, useful. Are there any TIPS ETFs, CEFs that you can, currently, recommend?
I always say I prefer to buy individual TIPS an hold them to maturity, and that’s still my base strategy. However, I do own two TIPS funds in a retirement account: Vanguard’s short-term TIPS fund (VTIP) and Schwab’s total U.S. TIPS (SCHP). Both will lose value if real interest rates rise. When I buy a TIPS at auction now (rarely) I buy it in that retirement account, selling enough SCHP to buy the TIPS.
VTIP is less sensitive to interest rate increases because of the shorter term. Take a look at this article (and the others linked at the bottom) for some ideas: https://tipswatch.com/2021/07/15/2021-and-beyond-whats-ahead-for-u-s-financial-markets/