Yes, you can make sense of the complex pricing of Treasury Inflation-Protected Securities.
By David Enna, Tipswatch.com
Last week, I decided to buy $15,000 of the new 10-year Treasury Inflation-Protected Security — CUSIP 91282CEZ0 — being offered at auction by the U.S. Treasury. I was making this purchase in a Vanguard brokerage account (a traditional IRA), where I had set aside $15,095 in cash for the purchase.
The problem was: Would that $15,095 cover the cost, after any premium/discount to par value, plus any additional accrued principal and interest? The Treasury’s official announcement for the auction wasn’t much help, with all the important pricing details to be “Determined at Auction”:
So I did a quick calculation:
- I was buying $15,000 of par value.
- I knew the real yield to maturity would be at least 0.50%, because that was where the 10-year TIPS market was trading. That would mean the real yield would NOT be below the coupon rate, which only happens when the real yield is less than 0.125%.
- Therefore, this TIPS would be sold with at least a slight discount to par.
- But … this TIPS would have an inflation index of 1.00495 on the settlement date of July 29, so that would add to my purchased principal, and the cost, along with a small interest adjustment for 14 days of the coupon payment (from the July 15 issue date to the July 29 settlement date).
- So, I figured, the highest cost I would end up paying wound be about $15,000 x 1.00495 = $15,074. And I concluded that my $15,095 would cover the cost.
Let’s see what happened
The auction ended up producing a real yield to maturity of 0.630%, which then caused the Treasury to set the coupon rate at 0.625%. When a TIPS has a real yield of 0.125% or higher, the Treasury always sets the coupon rate to the 1/8% below the real yield … 0.125%, 0.250%, 0.375%, 5.000%, 0.625% … and so on. A real yield of 0.630% gets a coupon rate of 0.625%, and the price is set at a very small discount to par. A real yield of 0.620% gets a coupon rate of 0.500%, and the price gets a bigger discount.
Here are the auction results, as reported by the Treasury in its official announcement:
So, what does this all mean — high yield, adjusted price, unadjusted price, adjusted accrued interest, index ratio — and how does it affect the price I paid?
The high yield becomes the TIPS’ official real yield to maturity in the auction records. It is the highest yield the Treasury had to grant to complete the $17 billion offering of this TIPS, and it is the real yield granted to all non-competitive bidders (that’s pretty much anyone putting in a purchase order at TreasuryDirect or through a brokerage).
After the auction was completed, Vanguard reported my cost for $15,000 of par value to be $15,070.55. What factors went into setting that price? Once the high yield was set, all the other pricing fell into place Let’s take a look:
The key factor in this chart is the unadjusted price, which was $99.9517 for $100 of par value, and that meant my core cost for the $15,000 in par value was $14,992.75.
But, because of the inflation index of 1.00495, I will be purchasing 14 days of inflation-adjusted additional principal on the settlement date of July 29. That raises my cost to $15,066.97.
In addition, I will have to pay for the 14 days of coupon rate interest that will have accumulated by July 29. Since the coupon rate is 0.625%, 14 days of interest would be about 0.0239%. That is why the adjusted accrued interest is set at $0.239 per $1,000 of par value. Since my accumulated principal will equal about $15,066.87 on July 29, my accrued interest is about $3.60.
And that sets the total cost of the investment: Inflation adjusted value + accrued interest. $15,066.87 + $3.60 = $15,070.57. (OK, Vanguard said it was 2 cents less. I’ll take it. Savings!)
The last line on that chart shows the total value of the investment on July 29, which is simply par value ($15,000) x the inflation index (1.00495) = $15,077.85. In this calculation, I am ignoring the coupon interest which will be paid out as current income twice a year. Also, don’t confuse “total value” with “market value.” Total value reflects only par value + inflation accruals. Market value adds in the fact that the price of a TIPS changes daily on the secondary market. If you are holding to maturity, you can more or less ignore market value.
Happy side note: The inflation index for this TIPS on Aug. 31 will be 1.01939, up 1.3% for the month because of the high rate of non-seasonally adjusted inflation in June. That will put its total value at $15,290.85. Not bad.
Conclusion
I hope this primer on TIPS pricing is helpful. The July 21 auction was an easy one because the real yield ended up just a hair above the coupon rate, making the unadjusted price very close to par. In the last two years that hasn’t be true, with negative real yields far below the lowest possible coupon rate of 0.125%. I am hoping we are entering a new era of positive real yields and much more sensible TIPS pricing.
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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 be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
Treasury Inflation-Protected Securities 
This is my first foray into TIPS. I am still struggling with how to determine the real yield on my prospective investment in TIPS. David, can you throw light on how Index Ratio (in the example above 1.00495 ) is determined? Is this a daily rate? Given this rate, is it correct to concluded that the annual inflation rate used for this factor is 1.80675 (0.00495*365)?
The bigger question for me is what am I trying to do? Worst case inflation goes to zero and I make 1.7%? Is that a win? Of course Fed rates will be sky high before this happens. I rather own appreciating bond as interest rates fall and earn maybe an 8% fixed rate. These TIPs seem like instant gratification and not much return for the trouble, unless bad things happen! Ill take my inflation hedge on the backend. I believe the Fed will continue to rise until the beast is slain. The flip side is one buys these if you think inflation will never come into control? Somebody tell me what I missed.
FYI: Don is not a believer in the danger of inflation or the need for inflation protection.
Thats what I needed to know. Its the runaway inflation over a long time you buy these for. So I seem to understand how these work with market events. Our only difference is inflation outlook and how long! If the Fed were not involved these would be great no competition! I think the Fed will win you think inflation will win. We are talking about a 5 – 10yr time frame. The easy money has already been made in TIPs and ibonds, imho. As are all securities that suddenly everyone is talking about in the news!
The index is adjusted daily, higher or lower, based on non-seasonal inflation two months earlier. October’s indexes are based on August inflation.
Would you please continue the example and show how to calculate the real after-tax return sequence you expect from this security? Assume some inflation rate and marginal tax ratio for illustration. I attempted it assuming 12% tax bracket and I get a negative return if inflation is above 6%, and this assumes I can reinvest interest payments in something that matches inflation.
That’s a complex request, outside my area of expertise. If you bought this in a tax-deferred account, would it be an issue? Otherwise, I would guess that any excess you earn for this investment would be considered interest income.
No big deal, but to be precise: the reason your calculation was off by $0.02 from Vanguard’s price is the accrued interest. Treasuries use a day count of actual/actual. In this case, that’s 14/184. So the unadjusted accrued interest is 14/184 * 0.625 = 0.237772. Adjusting that by inflation ratio gives: 0.237772 * 1.00495 = 0.238949. Multiplied by your amount of 15,000, that’s 3.58 in total accrued interest. So the total cost is 15,066.96+3.58 = 15,070.55… which is $0.02 less than what you calculated. I’d guess you used a day count of act/183 (?), which would give the cost in your calculation. So, your $0.02 of savings is thanks to an extra day in the longer months at the end of the year 🙂
David, What do you think of withdrawing cash from a Roth account to buy I-Bonds vs. leaving the cash in the Roth account to buy TIPS?
Probably doesn’t make sense to move money out of a totally tax-free account to buy an investment that will end up being taxed on redemption. I personally don’t buy TIPS in a Roth account, but it’s OK. The general thinking is that Roths should be stock market investments, since they will be the last to be withdrawn and have a long time to grow. I think a lot of people don’t follow that principle, and if you don’t, buying TIPS in a Roth is fine.
Thanks. I guess I was so smitten of late with I Bonds that I lost perspective. I’ll turn DRIP back on in my Roth and forgo the cash dividends.
Bloomberg reports 5 year TIPs have just gone negative: -0.01%. Yikes. Feels like deja vu all over again.
Purchased 2024 through 2027 TIPS last week but didn’t go as much as had planned as was thinking/hoping real yields would go higher so would dollar cost average in at lower prices. In reading Dave’s response below to Matt’s post, his guess is real yields will still rise higher so rather than reacting now I personally will wait it out a little to see what happens.
We have seen an amazing drop in both real and nominal yields in the last week. The most recent 5-year TIPS is trading with a real yield of 0.00% today. A month ago, that TIPS auctioned with a real yield of 0.362%, which at the time was disappointing. Not any longer. I’m not sure what to make of this downward trend.
Dave,
Well based on you and this site I’m thankful for what I purchased at both the 5-year and then last week’s 10 year, as well as what I purchased on the secondary market so whatever happens from here at least I got something lol.
One question though on the TIPS secondary market purchases I made for $10K each for 10/15/24, 4/15/25 and 4/15/26 they had .076, .274 and .454 positive real yields, respectively but now are all negative.
Since I purchased these on the secondary TIPS market they had some prior inflation adjustments that were added into the purchase price so as I understand it in a deflationary environment some of that can be clawed back but not sure how this works and how much concern one should have?
Thanks once again.
deeMatrix
It’s true that the inflation accruals can fall if we have some deflationary months. Most likely, in the long run you will be fine and inflation is going to continue at some steady pace in coming months, even if we get a blip lower here and there.
The inverted yield curve indicates that the bond market expects inflation to persist in the near term followed by reduced inflation and recession in the mid and long term.
https://www.bloomberg.com/news/articles/2022-07-27/widely-watched-yield-curve-at-most-inverted-in-decades-after-fed
You can now get 3% on a 26-week T-bill but only 2.7% on a 10-year bond.
What does it mean when Tips go negative? Does this mean the principal base decreases when the fixed rate is applied? So you still get something only less. Its just relative to my starting point? I could be totally wrong! I thought Crypto was complicated!
If the real yield goes negative (when you purchase a TIPS) then that means your investment will under-perform future inflation by that negative amount. After the purchase, the real yield going up and down in the secondary market will affect the value of your TIPS, but if you are holding to maturity, you can more or less ignore that. …. After a month where inflation is negative, the accrual balance of the TIPS will be adjusted down by that amount two months later.
With the TIPS we purchased that had positive real yields but now are negative the value in the secondary market is higher so this only comes into play if we were to sell them? Is there any benefit if TIPS are initially purchased with a positive real yield versus negative starting out and real yields decline after purchase?
DeeMatrix, If you buy a TIPS with a positive real yield, and then in the future that TIPS is trading on the secondary market with a negative real yield, it means the market value of that TIPS has gone up. It doesn’t affect your return if you are holding to maturity, but you could now sell that TIPS at a profit, if you wanted to.
Dave,
Thanks, still confused on purchasing at original auction versus on secondary market (with prior inflation accruals) in the price. If purchased at original auction you have no inflation accruals yet so if held to maturity will always get back the face value of what you bought in worse case if there is disinflation across the term so no loss of principal?
TIPS purchased on the secondary market with inflation accruals included that can fall if we have some deflationary months so there is additional potential principal risk? Is this additional risk worth buying TIPS on the secondary market to complete say a 5 year TIPS ladder or is it enough to warrant only buying original 5 year TIPS at auction over time where the original 5 year TIPS becomes a 4 year TIPS a year later and then you backfill it with a new 5 year TIPS and continue this process over next 3 years, etc?
Yup, the 5 year TIPS is down 50 basis points during the last month. However, it’s still up about 200 basis points from a year ago. Apparently, “the markets” had the .75% FED rake hike baked in. I thought the result would be a stabilizing of the markets.
But, after listening to Powell’s press conference I just don’t get the current situation. He kept pounding on the fact that nothing was going to deter further rate hikes until inflation returns to 2%. That’s a long, long way to go considering it hasn’t even started going down yet.
The stock market is up 1% today and yet bond prices are going up as well. The disconnect between current FED policy and the markets is beyond strange. The markets are acting like there’s no inflation, the FED isn’t raising rates and we’re back to ZIRP and QE.
The markets have gone from “baked in” to “half-baked”.
Here is something that explains it. https://www.marketwatch.com/story/the-fed-vowed-to-crush-inflation-with-higher-rates-then-the-stock-market-rallied-heres-why-its-not-good-news-11659037159?siteid=yhoof2
Not a bad article.
Thanks for the link.
That MarketWatch article seems to lay the blame on Powell’s refusal to provide clear guidance during his press conference on Wednesday, and on one dubious comment in particular that he made during the conference. While that analysis provides SOME explanation for the current irrationality of the stock and bond markets, there’s much more to it.
First, the markets are not, and have no excuse for acting like, little children who can’t think for themselves without having an adult lead them. Second, both the stock and bond markets were latching onto bits of good news, and ignoring all the bad news, in rallying even before Wednesday’s events. Third, those markets continued to rally today, even though the Fed’s favored inflation gauge–as Powell reiterated on Wednesday–came out very bad for markets today. And all of this is happening the same week that the IMF announced that the globe is teetering on the brink of a world-wide recession!
The markets’ irrationality can’t be chalked up solely to a single dubious comment, or to a lack of leadership. What’s going on as well is irrational exuberance; inflationary fatigue (similar to the irrationality of pandemic fatigue); and, yes, something that can happen when people don’t think for themselves and don’t have a leader to guide them on a leash: herd mentality.
These other MarketWatch articles from the past couple of days provide further helpful analysis along these lines:
https://www.marketwatch.com/story/was-feds-powell-dovish-or-not-4-key-takeaways-from-todays-press-conference-11658965985?mod=the-fed
https://www.marketwatch.com/story/whatever-youre-feeling-now-about-stocks-is-normal-bear-market-grief-and-the-worst-is-yet-to-come-11659078978?mod=mw_more_headlines
https://www.marketwatch.com/story/investors-betting-on-a-dovish-fed-pivot-are-engaging-in-a-delicate-dance-warns-goldman-11659118572?mod=mw_quote_news
https://www.marketwatch.com/story/stock-markets-post-fed-bounce-is-a-trap-warns-morgan-stanleys-mike-wilson-11659023817 .
Excellent post. Thanks. I’ll just point out that Powell said a lot of things the market could have seen as negative, but ignored those comments and focused on comments it “interpreted” as positive.
David,
Thanks for the compliment. And you’re right: I only implied, a bit too subtly, that the markets’ cherry-picking of information both before and after Wednesday was similar to what the markets did with what the Fed wrote, and Powell said, on Wednesday. Some of the MarketWatch articles to which I linked were explicit on that point.
Since the teachers are off for summer vacation for two months, the little children may continue to misbehave until the Fed’s September meeting, blithely assuming that by that time either that the inflation-related data will objectively justify less aggressive rate increases, or that we will be in such a serious recession that aggressive rate increases objectively cannot be justified. NO ONE knows how things will play out, largely because there are so many moving parts beyond the control of the Fed and almost everyone else on this side of the pond, such as: the pandemic, including future Chinese lockdowns; Putin; the continued reaction of the Eurozone to Putin; the climate, including what hurricanes may do to the oil supply; and a recession in (many?) other parts of the world.
Also unknown is how American consumers, businesses, and government officials will react to all the unknowns. As for how the markets will react, that’s an unknown as well. Earlier in the summer, there were days when the stock market went down markedly based on some new negative tidbit about inflation. But this week, that market soared in the face of a .75-point rate increase and particularly bad news on the PCE.
Herd mentality being what it is, the markets may be shaken even before September by an accumulation of information, but even by a particular piece of information. Aside from data, the little children often react to statements made by the teachers. Indeed, apparently the markets have been exuberant this week because of a single statement by Powell–which was inconsistent with most of the rest of what he said on Wednesday, and which was not supported by the unanimous written statement issued by the Fed shortly before Powell’s press conference–and because the markets are assuming that an impending recession will cause the Fed to back off. But while the teachers are on vacation, that won’t stop them from individually making public statements affirming what Powell said on Wednesday about the absence of a recession and/or about the strength of the economy in general and of the labor market in particular. A few choice words from the adults can do much more than a spanking can to get the children to behave.
I miss the clear message of Greenspan!
“I know that you believe you understand what you think I said, but I’m not sure you realize that what you heard is not what I meant.”
If markets were rational we would all be rich. MarketWatch does not have a monoply on opinions. Take your pick or make up your own rational. Im guessing no more major increases till after midterms! The article said to me the Fed is not on automatic now, but will be data driven. Markets luv certainty! Yes everything is political!
Yup. It’s highly unlikely that the Fed will suddenly become more aggressive before November, even though they should be because inflation is getting worse. (Volcker killed inflation in the early 80s by raising interest rates higher than the inflation rate; little chance of that now… or ever.) So, party on Garth!
Hi, given what’s happened with TIPS yields this week, what’s your guess of how they’ll change over the upcoming weeks/months? (Unfortunately, I don’t seem to understand which factors influence the yields.) I bought a considerable amount of TIPS at the recent 5 and 10 year auctions (those were my first such purchases ever), but now I’m regretting that I didn’t buy even more. Also, what’s your guess about when inflation will be below 3 or 4% again? Thank you!
My guess is that real yields will still rise higher, especially for the 5-year TIPS and the 10-year real yield should rise above 1%, at the least. But everything is in flux. I’d also guess that inflation should remain above 4 to 5% well into next year, but that also depends on the U.S. and even global economy. The yield trends seem to change every week or so. This is a volatile time.
Thanks for your quick response, and I really appreciate your blog!
I’m checking to see if your crystal ball has an update from when I asked 3 months ago about where TIPS yields are headed and/or at what level they’ll peak. 🙂 Thanks!
Yields have risen faster than I expected, but my crystal ball is now foggy.
How about the FED interest rate response? Any guesses when inflation is still 5%, well above their target. I’m guessing its FED 5% too.
The future is indeterminate. Nobody knows what inflation will be next year much less in five years. If the Fed isn’t successful in its rather timid tightening efforts then inflation next year could be higher than today, in which case loading up on TIPS now is a great bet. On the other hand, if the Fed is too successful then we could be headed for a “hard landing,” i.e. a recession and possibly deflation, in which case TIPS would be a lousy bet.
The rational wealth preservation strategy is to hedge your bet by going roughly 50/50 between TIPS and nominal fixed-rate bonds… or ~60/40 TIPS if you think inflation is going to exceed expectations… or ~60/40 fixed-rate bonds if you think inflation is going to be less than expected. But don’t go “all in” either way.
https://eversightwealth.com/when-tips-outperform-and-how-i-invest-in-them/
For me I figure out the worst case. Like inflation rate returns for two years and then fixed for 8yrs. I then compare it against say Short Term Cds with a lower rate for two yrs then reap the higher rate for 8 yrs. Again its a bond investment VS a Cash type investment.
That’s fine. A TIPS is a bond investment with a real yield instead of a nominal yield. Inflation has averaged 9.1% over the last year, 7.2% over the last 2 years, 3.9% over the last 5 years, 2.6% over the last 10 years and 2.5% over the last 30 years. I am assuming inflation is likely to average 2.5% over the next 10 years. That’s the mark you would have to exceed with short-term CDs. But the “worst case” would be if inflation averages 5% or more over the next 10 years. This happened in all the 10-year periods ending 1981 to 1989.
This is what I bought yesterday the longest of my ladder. I expect this will be close to 5% by next year this time then time to go a little longer.
US Treasury BILL 11/10/2022
– Yield to Maturity 2.507%
– Moody’s Rating NR , S&P Rating NR
– Transaction Fee $0.00
David, your TIPS advice is outstanding. Based on your site and input, we participated in both last week’s 10-year and last month’s 5-year TIPS reopen auction. Our intent is to start to add some inflation protection in our traditional IRA fixed income, above and beyond the decent amount of iBonds we have accumulated in our taxable account. We were new to individual TIPS so weren’t sure of the mechanics but your site helped get us over the hump.
When considering our plan I saw a lot of info on various sites regarding ladders constructed as an income floor during retirement to help fund annual expenses each year of the ladder. In our case, we meet our annual expenses without the need for TIPS but looking to keep up with inflation for some of our fixed income so thought maybe a 5-year TIPS ladder would be a good start. As such, we began with participation at the 5-year reopen auction and then subsequently purchased some TIPS for 2024, 2025 and 2026 on the secondary market (figured we’d dollar cost average in the remaining amount for each of these years as hopefully real yields continued to increase).
However, once we saw the info on the 10-year original issue on your site as a decent potential we thought let’s add this one in as well. Ok got a little caught up in the moment but the fact we’re in asset preservation in retirement mode moreso than growth at this point I figured let’s go for it LOL.
My question is whether it makes sense to continue as outlined with filling in the remaining amount for the 2024, 2025, and 2026 years we purchased AND also potentially go and purchase simlar annual amount for the remaining years of 2028, 2029, 2030 and 2031 which would give us 9 years total (didn’t include 2023 with negative real yield but could if considered worth it).
Your sage thoughts would be greatly appreciated.
Thanks,
– deeMatrix
It’s not a bad strategy to build a TIPS ladder stretching out 10 years, or even more My personal ladder has every year through 2029, and then is missing 2030 and 2031, then I have two for 2032, since I just bought those this year. Why am I missing 2030 and 2031? Because those were years with deeply negative real yields, which I didn’t want. So, be choosy. This strategy won’t make you rich. It is just a way to protect against unexpected inflation in the future.
I just thought of this one. TIPS and I Bonds will not make you rich. But they might help keep you from becoming poor.
Could you cut to the chase and tell us what the PRESENT annual nominal yield is for the first year? How often does the inflation part of the nominal yield change and what is it tied to? Thanks.
A TIPS has a set “real return” (meaning above inflation) while a bank CD or normal Treasury has a nominal return. With a TIPS, the principal balance rises each day, based on non-seasonally adjusted inflation two months earlier. In June, that inflation figure was 1.37%, so the principal balance of this TIPS will rise 1.37% in August. But from then on, the return will be based on monthly inflation figures. July’s number will set the accruals for September, and so on.
An investor who bought this TIPS at last week’s auction knows the real return will be 0.63% above inflation, for 10 years. A buyer of a 10-year Treasury note this week will get a nominal return of about 2.8%, but that investor won’t know how well that will do versus inflation.
What are your expectations to make on your $15,077? Where do you hope to do better then just brokered CDs etc going forward? What is the strategy that seems is worth the trouble? CDs are lagging but fo!low interest rate hikes to kill inflation. Seems like lock in long term CDs when inflation falls. My opinion is that jacking up rates will kill inflation. Maybe yours is significant inflation is here to stay?
I also have a law of signifcant money thats its worth extra hassel for significant money not just a few k.
These just make no sense to me unless I had a million to put onto these that needed a safe home!
My expectations are pretty clear: I will earn 0.63% more than inflation over the next 10 years. Why buy TIPS? I find it amazing that anyone would ask this question now when U.S. inflation is running at 9.1%, much higher than expected. TIPS are the investment you need when inflation is running hot. Nominal investments with attractive, set yields are the investment you want when deflation hits hard. So why not have both? Mix them.
Yes. Your research has shown that TIPS outperform nominal T Bonds about half the time, so a roughly 50/50 mix is appropriate — TIPS do better when inflation exceeds the “breakeven” inflation and nominal bonds do better when it doesn’t, A 50/50 mix is also what Adam Collins recommends.
https://eversightwealth.com/when-tips-outperform-and-how-i-invest-in-them/
I have about $126k of Ibonds with a high fixed rate. I know I am getting about a 3% fixed rated plus inflation adjustment. After holding these Ibonds 20yrs the return is about 4% annually just about the rate of inflation for the last 20yrs.
At .63% fixed, can be a decent return only in the years with inflation. I can seeTIPs with a couple of good years then stagnate. Probably a 1% annualized return I suspect after 10yrs(my guess is as good as anyones). Of course, if inflation keeps up at the current rate one will look like a genus if you load the truck on these. I keep looking at TIPs funds and a quick chart looks like it catching a falling knife. Of course, if you actually own the bond you can hold till maturity BE.
The world is also raising rates to slow things more. No way I could dump $500k into TIps today! Shortterm CD ladders at broker for me. My market positions will throw off extra gains with dividends today, to offset inflation and cover the cash measly return when and if the market recovers.
I just have a different opinion about inflation and how long it will last.
TIPs does not seem like a cash investment today but a bond type investment.
That what makes a market!
I have some of those early I Bonds, too. If you bought $10,000 in May 2000, that I Bond is currently paying 13.6% and the $10,000 is now worth $36,996. That’s a rate of return of about 6% over the 22 years. Inflation over the last 10 years has averaged 2.6% and over the last 30 years, 2.5%. I would never suggest immediately putting $500,000 into TIPS in one investment. But allocating a portion of your porfolio to inflation protection seems to make sense, now that we know that inflation is not dormant. … Yes, TIPS is a capital preservation investment. No doubt about that.
Hi David- Your site is very helpful in understanding TIPs but I’m confused about the chart in
WSJ showing 2 Maturity dates for 1/2025 with different coupon, bid, ask & yield rates
-1 has accrued principal of $1230 & the other $1545 -were both of these10 yr TIPS
& auction date was 1/2015 & why the difference in the same month?
Thank you
No, these are two completely different TIPS. At one time, this double maturity in one month was an oddity, but now is fairly common. I wrote about these two issues back in 2014: https://tipswatch.com/2014/08/05/the-10-year-tips-quandry-what-should-the-treasury-do-in-january-2015/
David, very helpful. Thank you. So does your TIPS then mature on July 15th, in 10 years?
Have you ever put in a competitive bid, just for the fun of it? I wonder if there is a minimum $ limit for a competitive bid, or other requirements that would exclude individual investors from doing so.
Yes, this is a new TIPS and it matures July 15, 2032. I don’t think a competitive bid would be wise because the non-competitive bid always gets the highest real yield to maturity. So if I made a competitive bid, the bid would either fail or come in at a yield lower than the high yield. Non-competitive bids are limited to $5 million an auction, so the big money people buying more than $5 million are forced to bid competitively.
Which of those values will remain fixed and which may vary on a reopen auction?
The coupon rate for CUSIP 91282CEZ0 will remain at 0.625% for the full 10-year term. The buyer at Thursday’s auction will receive a real yield to maturity of 0.630%, or 0.63% above official inflation. That is locked, but future buyers will see different yields and different prices. So the price and yield at the reopening auctions could be quite different, up or down. … Amazingly, this TIPS closed on the secondary market Friday with a real yield of 0.40% and a price of $102.16 for $100 of par. That is a huge swing in a day and a half.
Have you ever done a primer on the reporting of taxes from TIPS? I know that Treasury only issues an annual tax slip for the cash coupon paid in that year. Then in the year the TIPS matures a separate slip is issued that looks like any other slip but includes ALL of the inflation premium added to the principal throughout the term. This makes it appear to tax authorities receiving the slip that all of that inflation premium was earned in the last year.
TreasuryDirect issues a tax form (a jumbled mess, in my opinion) that includes both 1099-INT for the coupon interest you received and 1099-OID for the inflation adjustments on TIPS. Both are taxable in the current year. It may also note a matured TIPS, but I’ve never had a reporting problem with this, and I’ve had a lot of matured TIPS at TreasuryDirect. (This isn’t an issue in a tax-deferred account held at a brokerage, of course.)
This is simply one of the best pieces of financial journalism I’ve ever read! Thanks so much for explaining the Treasury’s arcane terms and figures and going through those calculations. Your commentary on TIPS and I Bonds has really helped me over the past few years, and based on your preview of this recent 10-year TIPS I was also a (very satisfied) buyer.
Thanks David, appreciate it. This auction looked a little punk Thursday morning, but turned out well. Sometimes my opinions aren’t the greatest, I admit it, but I try!