CUSIP 912828SA9 was the first-ever 10-year TIPS to auction with a negative real yield. Still, it ended up out-performing its nominal counterpart.
By David Enna, Tipswatch.com
On January 15, 2022, a 10-year TIPS — CUSIP 912828SA9 — matured. It was first auctioned on Jan. 19, 2012, with a real yield to maturity of -0.046% and a coupon rate of 0.125%. That auction made history as the first-ever 10-year TIPS to receive a negative real yield. The numbers are uninspiring, but look fairly attractive today after a decade of much lower negative real yields.
Here’s the question: How did CUSIP 912828SA9 do as an investment versus a nominal 10-year Treasury? It turns out … well … it did OK.
I’ve been writing about Treasury Inflation-Protected Securities since 2011, and I’ve been investing in these products since 1999. I track the performance of every maturing 10-year and 5-year TIPS, as they mature in January, April and July. For more on this, see my ‘Tips vs. Nominals‘ page.
Here’s what I wrote back on Jan. 9, 2012, in my preview article about CUSIP 912828SA9:
The 10-year TIPS auction of Jan. 19 will be interesting to watch. Will it make history with a first-ever negative yield for a 10-year TIPS? And is that still attractive to buyers? … We are certainly entering uncharted waters for Treasury yields. Uncharted waters ought to make you uneasy. A negative real return over the next 10 years ought to make you uneasy. But there are no super-safe alternatives, and TIPS protect you against an unexpected rise in inflation.
On the day CUSIP 912828SA9 auctioned, a nominal 10-year Treasury was yielding 2.01%, creating an inflation breakeven rate of 2.06%. As it turned out, thanks to some lofty inflation numbers in recent months, inflation over those 10 years averaged 2.1%, and the TIPS investment ended up being the winner, by a small margin.
In general, 10-year TIPS have performed better when the inflation breakeven rate dips below 2.0%. Right now the 10-year breakeven is about 2.46%. Does that make a 10-year TIPS unattractive? I’d say no.
TIPS have been under-performing nominal Treasurys for most of the last decade because inflation for much of that time ran lower than expectations. We seem to have turned the corner on that, with official U.S. inflation now running at 7.0%, much higher than expectations. Will that trend continue? It seems likely, for awhile at least.
Here is how 10-year TIPS have performed versus 10-year Treasury notes for all maturities since July 2013:
Notes and qualifications
This chart is an estimate of performance, because it uses a full month of inflation in the ending month, when actually TIPS accruals are based on a half month for the first and last months, with the origination and maturity occurring on the 15th of the month.
Keep in mind that interest on a nominal Treasury and the TIPS coupon rate is paid out as current-year income and not reinvested. So in the case of a nominal Treasury, the interest earned could be reinvested elsewhere, which would potentially boost the gain. For certain, we don’t know what the investor could have earned precisely on an investment after re-investments.
In the case of a TIPS, the inflation adjustment compounds over time, and that will give TIPS a slight boost in return that isn’t reflected in the “average inflation” numbers presented in the chart.
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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.
Nice article! I am looking to find the actual cash flows associated with a TIPs CUSIP so I can compare those to a comparative nominal fixed rate treasury and compare the IRRs.
For TIPS you can use the site eyebonds.info to find cash flow information. For example, for CUSIP 912828SA9 use this page: http://eyebonds.info/tips/hist/tips43hista.html
Thank You. That negative yield sure makes it complicated. Did the investor come out of pocket or was that somehow baked into the purchase price?
When a TIPS auctions with a negative real yield the Treasury sets the coupon rate at 0.125% and investors have to pay a premium price. In this case it was about $101.66 for $100 of value.
Thank you for your excellent work. Would you consider publishing an article on how TIPS would be expected to perform in a rising rate environment. And how an investor would figure that. Thank you.
My strategy for individual TIPS is to buy them at auction and hold them to maturity. So at the original purchase I know exactly the return I will get, plus or minus official inflation. I don’t track market values, I just track the accrued principal balance of the TIPS, until maturity.
But for TIPS funds, this is a legitimate issue, because the value will rise and fall every day with the market value of the underlying TIPS. In a rising rate environment, the market value of TIPS will decline. However, if inflation is strong, the inflation accruals could cover part of that loss. Way back in 2016, I wrote about this issue for SeekingAlpha; https://seekingalpha.com/article/4003690-investors-should-know-tips-etfs-and-mutual-funds-are-riskier-you-think
As always highly useful information, which all should be grateful for. As far as predictions go though: ” It’s tough to make predictions, especially about the future.” The late, great, Yogi Berra. One could always buy some of each, shading the proportions as inclined.