New 10-year TIPS auctions with a real yield of -0.540%

The auctioned real yield came in higher than current market pricing, indicating fairly weak demand for this offering.

By David Enna, Tipswatch.com

The Treasury’s offering of $16 billion in a new 10-year Treasury Inflation-Protected Security — CUSIP 91282CDX6 — generated a real yield to maturity of -0.540%, above current market yields for TIPS of this term. The issue got a coupon rate of 0.125%, the lowest the Treasury will go for any TIPS.

At the market close yesterday, the U.S. Treasury was estimating the 10-year real yield at -0.57%, a bit lower than today’s result. In addition, a 9-year, 6-month TIPS was trading this morning on the secondary market with a real yield of -0.65%, well below the auction result.

So it looks like this auction was met with lukewarm demand and the Treasury was forced to give this TIPS a slightly higher real yield than predicted. The question: Are investors sitting on the sidelines, waiting to see how interest rates will trend in coming months?

Today’s investors paid an adjusted price of about $107.08 for about $100.25 of value, after accrued inflation is added in. This TIPS will have an inflation index of 1.00253 on the settlement date of Jan. 31. Investors had to pay a premium price because the real yield of -0.540% is well below the coupon rate of 0.125%.

So, it looks like investors got a bit of a bargain at today’s auction. The real yield of -0.540% was the highest recorded for any 9- to 10-year TIPS auction since May 2020.

Real yields have been climbing in recent weeks, following signals that the Federal Reserve intends to stop bond-buying stimulus in March, and then begin raising short-term interest rates. Here is the trend in 10-year real yields over the last year, showing how yields have climbed since deep lows in August and November 2021:

Inflation breakeven rate

With a 10-year Treasury note trading with a nominal yield of 1.83% at the auction’s close, this new TIPS gets an inflation breakeven rate of 2.37%, which seems attractive. The rate means this TIPS will out-perform a nominal 10-year Treasury if inflation averages more than 2.37% over the next 10 years.

Inflation expectations have been falling since late 2021, triggered by investor belief that the Federal Reserve will take needed actions to tamp down soaring inflation. Here is the trend in the 10-year inflation breakeven rate over the last year.

Reaction to the auction

The TIP ETF — which holds the full range of maturities — had been trading higher all morning, indicating lower yields. But after the auction’s close at 1 p.m. EST, the ETF slipped lower. This is an indication of lukewarm support for the auction. In addition, the bid-to-cover ratio was 2.30, the lowest for any TIPS auction of this term in more than a year.

The Treasury might be disappointed — it had to pay a slightly higher yield than expected — but investors at today’s auction should be pleased. The real yield of -0.54% was 60 basis points higher than the most recent auction of this term. That auction, in November 2021, resulted in a record-low real yield of -1.145%.

Personal note: I considered making a small investment in this TIPS in my Vanguard brokerage account , but I didn’t realize that Vanguard closes off auction orders at 10 a.m. on the morning of the auction. I swear it was 9:55 a.m. when I looked to make an order, but I got cut off. Lesson learned. I don’t know if this is true at other brokerages.

Anyway, this TIPS will get reopening auctions in March and May. Maybe we will see even better yields by then. Here’s a history of recent auctions, showing the string of 11 auctions of this term with negative real yields.

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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 New 10-year TIPS auctions with a real yield of -0.540%

  1. Rob says:

    David,
    Are you planning to write a column about the possible next Fed rate move and how it might affect inflation protected securities?

  2. Len says:

    Sitting on the sidelines myself. Of course the Fed will try to ‘jawbone’ their way out of this. Meanwhile I am rejecting a negative real return while also paying income tax on the accrued interest.

  3. DW says:

    when TIPS are auctioned, does the Fed’s planned purchase amount have any direct effect on the auction result?

    • Tipswatch says:

      The Fed doesn’t buy new TIPS by bidding competitively at auction, but it does roll over existing TIPS that mature, I believe through non-competitive bids and through primary dealers, who do buy at the auctions. At this point the Fed owns more than 20% of all existing TIPS, so I am sure its rollover purchases do have an effect, even though it accepts the non-competitive result.

  4. Doug Cox says:

    Fidelity also cuts off buying early the day of auction – sometime between 8am-9am Central time.

  5. Ladder Up says:

    I am very pleased. I spread my purchases over time, and was relieved to see the real yields turn upwards. Not positive yet, but it’s a started!

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