10-year TIPS reopening gets real yield of -0.939%, well off record low

By David Enna, Tipswatch.com

The Federal Reserve’s statements Wednesday indicating a timeline for tapering its bond purchases and eventual moves to raise interest rates gave investors at Thursday’s 10-year TIPS reopening auction a bit of a boost.

This auction of a 9-year, 10-month Treasury Inflation-Protected Security, CUSIP 91282CCM1, generated a real yield to maturity of -0.939%, holding above the record low for any auction of this term, -1.016%, set in the July 21, 2021, originating auction for this 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 in this case, below) inflation.

Just a day ago, 10-year real yields were running very close to -1.0%, meaning investors would accept a return that lagged official U.S. inflation by 1.0% a year, for 10 years. But the Fed’s actions Wednesday gave Treasury bond yields a slight boost higher, and investors at today’s auction benefited.

CUSIP 91282CCM1 has a coupon rate of 0.125%, which was set at that July originating auction and is the lowest the Treasury will go for any TIPS. That means investors at today’s auction had to pay a sizable premium — an adjusted price of about $112.98 for about $101.84 of value, after accrued inflation is added in. This TIPS will have an inflation index of 1.01843 on the settlement date of Sept. 30.

The real yield of -0.939% ended up being pretty much in line with several auctions of this 9- to 10-year term:

  • Jan. 21, 2021: -0.987%
  • Sept. 20, 2020: -0.966%
  • July 23, 2020: -0.930%

That’s a depressing list for TIPS investors, who should be coveting real yields at least 50 basis points above zero, providing a positive return over inflation. We are a long way off from that, but possibly the Federal Reserve will carry through on plans to lift interest rates in the next two years.

Here is the trend in 10-year real yields over the last two years, showing the deep plummet after the Federal Reserve began aggressive bond buying in March 2020. Note that we remain very close to the bottom of this range:

Inflation breakeven rate

With a nominal 10-year Treasury note trading this afternoon with a yield of 1.40%, this TIPS gets an inflation breakeven rate of 2.34%, in line with several recent auctions of this term. It means CUSIP 91282CCM1 will outperform a 10-year nominal Treasury if inflation averages more than 2.34% over 9 years, 10 months. While that breakeven rate is historically high, it seems reasonable given the nation’s recent surge of inflation.

Here is the trend in the 10-year inflation breakeven rate over the last 2 years, showing the incredible surge higher after the deep market chaos of March 2020. In recent months, 10-year inflation expectations have leveled off in the 2.3% to 2.4% range:

Reaction to the auction

This TIPS trades on the secondary market, and earlier this morning, at 11:05 a.m., it was trading with a real yield to maturity of -0.92%. So the eventual result of -0.939% looks like this auction was met with solid demand. The bid-to-cover ration was 2.55%, also an indication of solid demand.

If the Federal Reserve carries through with tapering its bond-buying, beginning in November, we should begin to see a gradual increase in real yields, moving in lockstep with nominal yields. The TIPS market is not heavily traded, and the Federal Reserve’s purchases have had a major effect in pushing real yields deeply negative. That should begin to change, but gradually.

CUSIP 91282CCM1 will have one more reopening auction, on Nov. 18. It will be interesting to see if 10-year real yields climb a bit in the next two months, making that auction potentially more attractive.

Here is a history of recent 9- to 10-year TIPS auctions, showing how the Fed’s aggressive bond-buying, which began in March 2020, has pushed real yields deeply negative:

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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.

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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