New 30-year TIPS auctions with a real yield of 0.195% to seemingly weak demand

By David Enna,

Despite a flight to safety sending yields downward in the Treasury market, a new 30-year Treasury Inflation Protected Security auctioned Thursday with a higher-than-expected real yield to maturity of 0.195%, the first positive real yield for any TIPS at auction in nearly two years.

This is CUSIP 912810TE8, which received a coupon rate of 0.125% based on the auction results. So today’s investors got another thing they haven’t seen in nearly two years: A TIPS auctioning with a discounted price, because the real yield to maturity was higher than the coupon rate. The adjusted price was about $98.10 for about $100.14 of value, after accrued inflation is added in. This TIPS will have an inflation index of 1.00142 on the settlement date of February 28.

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 current U.S. inflation. So the “real yield to maturity” of a TIPS indicates how much an investor will earn above inflation.

The last time a TIPS auction of any term got a positive real yield was for a 10-year reopening auction on March 19, 2020, amid a day of near-complete market chaos because of pandemic fears. A few days later, the Federal Reserve launched an aggressive campaign to stabilize the Treasury market, sending real yields deeply negative.

While the market had been signaling that this new TIPS would get a positive real yield, the auction result was still a surprise. At 11:10 a.m. EST, a 29-year, 6-months TIPS was trading on the secondary market with a real yield to maturity of 0.10%. After the auction’s close, that yield increased to 0.18%, a pretty impressive move higher.

Obviously, investors in this new issue wanted higher-than-market yields, and the auction delivered. The bid to cover ratio was 2.17%, a low number that also indicates weak demand.

Here is the trend in 30-year real yields over the last 11 years, dating back to before an earlier phase of Federal Reserve quantitative easing, which began in spring 2011:

This chart might tell us where real yields could be heading in coming years. Note how in 2013 30-year real yields surged higher, because the Fed raised the possibility of tapering its bond-buying program, which didn’t actually begin until early 2014. Yields began declining in 2019, as the Fed started easing off on tightening.

The difference in 2022 is that the Fed is signaling an accelerated schedule: It could begin raising short-term interest rates and gradually reducing its balance sheet within a month. In that scenario, real yields should be climbing higher, and that was probably the message the market was sending today.

Inflation breakeven rate

With a 30-year nominal Treasury trading today with a yield of 2.30%, this new TIPS gets an inflation breakeven rate of 2.11%, on a par with recent auctions of this term. Clearly, investors are not foreseeing unusually high inflation over the next three decades, despite the current surge to 7.5% in January 2022.

For investors in today’s auction, an inflation breakeven rate of 2.11% looks like a positive. Here is the trend in the 30-year inflation breakeven rate over the last 11 years:

While the 30-year inflation breakeven rate surged strongly after March 2020, with the beginning of aggressive economic stimulus by Congress and the Federal Reserve, it has now settled into a “normal range” based on historical standards.

Reaction to the auction

The TIP ETF — which holds the full range of TIPS maturities — had been trading higher all morning, indicating lower real yields. But after the auction’s close at 1 p.m. EST, prices quickly dipped, indicating a negative reaction to the auction. Since then, however, the TIP ETF has stabilized.

Investors saw a similar reaction in LTPZ, Pimco’s 15+ Year U.S. TIPS ETF. Two minutes before the auction’s close, it was trading at $80.98 a share, but four minutes later had fallen to $79.68, a drop of 1.6% in the blink of an eye.

A 30-year TIPS isn’t a highly desirable investment for small-scale investors, Non-competitive bids amounted to only $14 million of the total of $9 billion auctioned Thursday. So today’s auction showed that the market’s big money — hedge funds, pensions funds, sovereign banks — are looking for higher yields. That could be continuing trend.

The Bloomberg report on the auction theorized that a “hawkish shift by the Federal Reserve is dashing demand for inflation-indexed Treasuries.”

The auction went begging “because when the Fed hikes, their primary goal is to move long-end real rates higher,” said Gang Hu, managing partner at Winshore Capital Partners LP. “Yes, we have moved them higher by a fair amount, but to be long them is to fight the Fed.”

CUSIP 912810TE8 will be reopened at auction in August. Here’s a recent history of TIPS auctions with 29- to 30-year terms:

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Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear.

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 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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10 Responses to New 30-year TIPS auctions with a real yield of 0.195% to seemingly weak demand

  1. Pingback: 30-year TIPS reopening auction is coming Thursday. Any takers? | Treasury Inflation-Protected Securities

  2. Glenda Wiegman says:

    So, in you’re opinion what’s the odds of the 5 year tips auction selling at or below par this year?
    I see from the Treasury Direct website they’re offered in the following months.
    “The 5-year TIPS is auctioned as an original issue in April and October. The 5-year TIPS is auctioned as a reopening in June and December.”
    Are there any “gotchas” to purchasing the reopenings versus the original issues?
    I’m just looking for a place to park some IRA CD’s that are maturing this year.

    For the first time that I can remember, the inflation rate is higher than 5 year CD rates.
    Even back in the 1980’s you could get CD’s that beat inflation.
    And, you didn’t have to go out 5 years to achieve that.
    Of course, this is mostly due to the pandemic and the FED’s eternal ZIRP/QE policies.
    At my age and net worth, preservation of capital is my only concern.

    My ancestors are Ukrainians and left the country as daring teenagers around 1910.
    Because of them, our American clan has missed out on a lot of historical nightmares.
    The Russian Revolution, WWI, the Holodomor, WWII and yet another Russian invasion.
    In the grand scheme of things us folks that have these kind of “problems” shouldn’t complain


    • Tipswatch says:

      Glenda, I feel for the people of Ukraine. Three years ago, I traveled in Lithuania, Latvia and Estonia and I felt great energy and progress in those societies. Real potential after decades of misery. Ukraine couldn’t quite get there and now the future looks bleak.

      On the 5-year TIPS, I think there is a decent chance that 5-year real yields will get close to zero in 2022. That’s a long climb higher, 116 basis points as of today’s close. Back in 2013, 5-year real yields climbed 136 basis points, so it’s possible.

      Of all the TIPS at auction, the 5-year will be most sensitive to increases in short-term interest rates. So its possible you will see at-par auctions this year, especially for the 10-year TIPS, but that might depend on the course of the U.S. economy.

  3. Arthur McBride says:

    Given that interest rates in general will likely be rising, and higher inflation, do you still think series EE bonds that need to be held for 20 years to get 3.5% (or else you only get 0.1%) are still a good bond investment for people who can hold them for 20 years?

    • Tipswatch says:

      It’s a good question. I do think that for the person that can hold them for 20 years, EE Bonds remain a sensible investment. I think there’s a good chance inflation will run lower than 3.5% over the next 20 years, on average. So a combo of EE and I Bonds would cover both possibilities. I’ve looked back at yields for 20-year nominal Treasurys and they topped 3.5% briefly in December 2013. That’s the only time in the last decade they’ve topped 3.5%.

  4. Michael d. Mitchell says:

    I am new at this. At age 70+ I invested $20K in the August ’21 TIPS auction and $5K in yesterday’s TIPS auction. Good choice or a fool and his money?

    • Tipswatch says:

      A TIPS is a safe investment, especially if you plan to hold it to maturity. Are you also investing in terms less than 30 years? You’ll be over 100 when these mature. Do you have plans to leave these to heirs?

    • MM says:

      I had no real plans for the money I invested in the TIPS auction other than not to spend it on fast fast cars and/or loose women. I had maxed out on the I-bond limit so TIPS seemed a good option. I am not an astute investor, so I assumed that a long term TIPS was as good as a short term for my purposes. If/when the Grim Reaper comes for his harvest my heirs shall divide the spoils.

  5. Ladder Up says:

    I was very tempted by this. I just don’t know if I can make it to age 89. I guess I’ll stick with laddering the 10-years.

    • Tipswatch says:

      Yeah, I hear you. The last 30-year TIPS I bought was auctioned in February 2011, when I was 57 years old. That one had a coupon rate of 2.125%. The real yield to maturity was 2.19%. I won’t be selling it.

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