10-year TIPS reopening auction gets a record-low real yield of -1.145%

By David Enna, Tipswatch.com

The Treasury’s offering of $14 billion in a 10-year TIPS reopening auction Thursday generated a real yield to maturity of -1.145%, the lowest ever for any TIPS auction of this term.

This is CUSIP 91282CCM1, and the auction created at 9-year, 8-month Treasury Inflation-Protected Security with a coupon rate of 0.125%.

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.

So the real yield to maturity of -1.145% means investors are willing to under-perform official U.S. inflation by that amount for nearly 10 years. And they had to pay a lofty premium price to collect the coupon rate of 0.125% plus a return matching inflation. The adjusted price at this auction was about $115.60 for about $102.38 of principal, after accrued inflation is added in. This TIPS will have an inflation index of 1.02337 on the settlement date of Nov. 30.

But in a world of near-zero returns for all safe investments, this TIPS does offer the security of insurance against surprisingly high inflation over the next 10 years. Inflation fears are rising, and TIPS offer some security against those fears.

Real yields for 10-year TIPS have fallen sharply over the last 20 months, in the wake of a massive bond-buying program by the Federal Reserve combined with renewed demand for inflation protection. Here is the trend for 10-year real yields over the last 5 years, showing the plummet that resulted after the market panic in March 2020:

The Federal Reserve has officially (and gradually) begun to taper its Treasury purchases, but so far, this change has had little effect on real yields, which continue at all-time low levels. It’s a depressing time for investors interested in safety.

Inflation breakeven rate

With a 10-year nominal Treasury trading at 1.58% at the auction’s close, this TIPS gets an inflation breakeven rate of 2.73%, at the very top of the Treasury’s history of the 10-year breakeven rate, which dates back to 2009. Normally, I’d be saying alarm bells should be ringing (avoid TIPS!) but that’s a hard call when official U.S. inflation is running at 6.2%. If inflation continues at a rate of 4% to 5% or higher over the next 10 years, this TIPS will end up being a stellar investment.

Then again, no 10-year inflation period (ending in December) has run higher than 3.9%, dating back 30 years. Have we entered a new era for inflation?

Here is the trend in the 10-year inflation breakeven rate over the last 5 years, showing the surge of inflation fears rising out of the aggressive economic stimulus of the last 20 months:

Reaction to the auction

This TIPS trades on the secondary market; it was trading with a real yield to maturity of -1.14% around 8 a.m. ET. Just before the auction closed at 1 p.m., it had a real yield of -1.16%. So the auction result of -1.145% looks like demand was mildly lukewarm, but more or less as expected. Investors were not beating down the doors for this reopening. The bid-to-cover rate was 2.43, the lowest in the last four auctions of this term.

Here is the one-day trading chart for the TIP ETF, which holds the full range of maturities. It had been trading slightly higher all morning, indicating slightly lower yields. Not much happened after the auction’s close. It looks like this auction went off as expected.

This auction closes the books on CUSIP 91282CCM1, which also set an earlier record-low for this term in its originating auction on July 22. The Treasury will offer a new 10-year TIPS on Jan. 20, 2022.

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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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7 Responses to 10-year TIPS reopening auction gets a record-low real yield of -1.145%

  1. Todd Brunjes says:

    I have a significant amount invest in TIPS via mutual fund at vanguard. Have 60 stocks and 40 fixed income ratio. In IRA account at vanguard.

    How would I change to have actual bonds via Treasury Direct?

    I do not want to hold long term bonds via mutual fund, but would like to ladder into TIPS if I directly own, but would appreciate guidance on easiest/best way to manage TIPS bonds in an IRA.

    • Tipswatch says:

      Since you are holding these funds in a tax-deferred account (hopefully a brokerage account), before each TIPS auction you can sell some TIPS fund holdings and buy the same amount at the TIPS auction, which you can do through Vanguard’s brokerage at no cost. The TIPS remains in the tax-deferred account and the purchase has no tax consequences. I have done this in the past, converting SCHP into 5-year TIPS, which lessens my risk, or at least makes me feel like there is less risk, since I will hold the TIPS to maturity.

      Buying from TreasuryDirect would be more complicated since you would need to move money out of the IRA and face tax consequences.

  2. James Bolger says:

    I would like to better understand the math behind TIPS. Can you recommend an article or publication which might help? Other than tipswatch.com of course, which is great.

  3. Jim says:

    “ settlement date of July 30.”. Think you meant November 30 for the settlement date

  4. Ladder Up says:

    I am going to have to hold my nose recording my purchases in Quicken. But I said that about the previous purchases too, this past year.

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