By David Enna, Tipswatch.com
The Treasury’s offering today of $19 billion in a reopening of a 5-year Treasury Inflation-Protected Security generated a real yield to maturity of 1.504%, a good result for investors. This is CUSIP 91282CFR7, and the reopening created a 4-year, 10-month TIPS.
This TIPS was created in an originating auction on Oct. 22, 2022, and at that time got a real yield of 1.732%, the highest for any TIPS of this term in 15 years. The coupon rate was set at 1.625%, also a 15-year high.
In the two months since that original auction, real yields have been drifting lower. Before today’s auction closed at 1 p.m ET, this TIPS was trading on the secondary market with a real yield of about 1.48%, so the auction result of 1.504% was a positive result for investors. Since April 2009, this is only the third auction of the 4- to 5-year term to get a real yield higher than 1%.
Here is the trend in 5-year real yields over the last two years, showing the sharp rise higher beginning in spring 2022, and then the drift lower in the last two months:
Pricing. Because the auctioned real yield came in below the coupon rate of 1.625%, investors had to pay a premium price for this TIPS. The unadjusted price was about $100.56 for $100 of value. The adjusted price was about $101.14 for $100.58 of value, including accrued inflation. This TIPS will have an inflation index of 1.00576 on the settlement date of Dec. 30.
In addition, investors will pay about 34 cents per $100 of value for coupon interest through the settlement date. That money will be returned at the first coupon payment on April 15.
Inflation breakeven rate
At the auction close at 1 p.m., the nominal 5-year Treasury note was trading with a yield of 3.77%, creating an inflation breakeven rate of just 2.26% for this TIPS. That looks highly attractive and means that this TIPS will outperform the nominal Treasury if inflation averages higher than 2.26% over the next 4 years, 10 months.
Later this afternoon, three hours after the auction close, the 5-year nominal rose to 3.80% and this TIPS was trading with a real yield of 1.53%, even higher than the auction result. That pushed the market’s breakeven rate slightly higher, to 2.27%.
Here is the trend in the 5-year inflation breakeven rate over the last two years, showing the remarkable decline lower since the spring, as the Federal Reserve has taken a hawkish posture against inflation:
Reaction to the auction
Something interesting was happening here, but I’m not exactly sure what. The auctioned real yield climbed higher than expected, which would indicate weak demand. The bid-to-cover ratio was 2.59, which indicates acceptable demand. But my curiosity was aroused when I saw that the high yield of 1.504% was allocated to only 33% of investors. At the October auction, the “allocated at high” was 58%. Last December, it was 82%.
What does it all mean? Who knows, but today’s auction ended up with a real yield above 1.5%, which I consider attractive, along with a lower-than-expected inflation breakeven rate. Investors can be happy with this result.
This auction closes the books on CUSIP 91282CFR7, one of the most attractive TIPS offerings in more than a decade. A new 5-year TIPS will be auctioned April 20, 2023.
Coming Tuesday. I will be publishing a guide to the “Language of TIPS,” the result of a “valiant” effort to explain the complex terminology and processes. Did I succeed? Look for that Tuesday morning.
* * *
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.Please stay on topic and avoid political tirades.
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 
The original issue 91282CFR7 was auctioned on Oct 20 according to the Treasury documents. You have 10-Oct-22 in your recent history table.
Thanks for catching that. I will fix it when I can get to a computer.
Would you please explain more about this: “In addition, investors will pay about 34 cents per $100 of value for coupon interest through the settlement date. That money will be returned at the first coupon payment on April 15.” Sounds like it’s above and beyond the coupon payment? And why? Or were we prepaying part of the coupon payment for some reason? Thanks.
Pingback: Let’s take a quick look at the pricing of this week’s TIPS auction | Treasury Inflation-Protected Securities
Merry Christmas Tipswatch! Thank you for your newsletters!
I had purchased TIPS through regular auctions before without issues, but this is my first time placing an order for a reopening. My broker, E-Trade, ended up charging me 101.6251 (+ accrued interest).
Should not I have received 101.135096 (+accrued interest) as announced by the Treasury?
Not sure if E-trade made a mistake or if there is something about reopenings that I do not understand. Thx.
Did you call in an order or do it all online? Can you see a commission charged on this order? Several people with ETrade seem to have this issue.
This was all done online. I had missed the comments below from Paul and Mary but yes, this looks like the same issue. I actually purchased the same face amount as Paul and got the same weird math and totals on my trade confirmation. I will follow-up with E-Trade. Thanks for your help and Happy Holidays!
Just an update: E-Trade did not reply to my email but they corrected the transaction last night (it shows as one “Cancel Sold” and one new “Bought” at the correct price). I guess they must have realized their mistake.
This is a rather serious mistake by E-Trade, and we have no way to know if they would have made the correction without being called out. I assume they have now fixed all the transactions. Strange stuff.
https://bigcharts.marketwatch.com/default.asp
type in stock symbol tdtt or stip change the chart setting to 2 years . look how much tips prices in etf’s have fallen.
the etf’s just pay a simple monthly dividend. you might never recoup the drop in the value per share of the etf. if you buy the bond when it matures you will get the face value plus accrued principal and semi annual interest. a lot less risk in my opinion.
I also prefer buying individual TIPS and holding to maturity. But STIP has a year-to-date total return of -2.78%. (Not disastrous.)
How does TD come up with a real yield of 1.504%? Thanks.
If a non-competitive bid automatically receives the high yield. Why would anybody place a competitive bid?
There is a dollar amount limit on non-competitive bids. It’s $10 million. Big money comes in to fill the $19 billion offering.
Non-competitive bids are capped at $10 million. The big boys (Pension funds, foreign central banks, etc.) play well above that limit. So, they have no choice to bid competatively.
Everyone who actually gets the bond/note/etc. gets the high yield, but the competitive bids are what determines what that is. Competitive bids are saying “I’m willing to buy at a yield of X%”, and then Treasury goes through, checks off all the non-competitives, then all the competitives starting from the bottom until they get to the total value they are distributing. So someone who placed a competitive bid of 1.43% will get the TIPS (at the same price as me, who ordered non-competitive), while someone who bid at 1.57% gets nothing. A competitive bid is basically “If I can get it at this price (or better), I’m in. If the price is higher than that, I’m out.” Non-competitives are saying “I don’t care, I’m buying the thing, let me know what the price is.”
Excellent information
I paid 5098.28 101.7176… for a 5000 investment in the 12/22/2022 TIP auction. How did they come up with that number? I can’t get there using the numbers you provided. Thank you.
It looks like the price they are showing includes the $0.341240 accrued interest, but when I add that in I get to $101.476. Not sure. Is it possible there was a brokerage commission? What settlement date are you seeing?
Settlement date is 12/30/2022. No commission. Price they show is 101.14 but they charged me as I stated 5098.28 and the transaction showed 101.72 price. I come up with a price of 5073.76 with the .34 cent included.
Contacted E-Trade and they agreed there was a problem. No refund yet but they owe me 24.525 so definitely not a commission. My guess is they made the same mistake on all people participating in the auction.
Thank you so much for this site as I doubt I would have caught the error without your numbers. Also thank you to all the other people who responded.
I agree, Paul, that we can rule out it being a commission. When I spoke to E-Trade to inquire about this trade outcome, I confirmed with their representative that they do not charge commission or transaction fees for treasury auctions.
I share your appreciation for this site and all the commenters. It has been a very helpful resource, since I’m new to TIPs and trying to better understand them.
Just to let everyone know:
E-Trade refunded $24.56 to my account so my total cost was 5073.72. Thanks again for all the information you provide. Really doubt I would have caught this without your numbers.
I participated for $4000 in the TIPs auction. My account was debited for $4059.05. That equates to $101.476 which includes the principal and accrued interest.
So, maybe Paul had to pay a $25 brokerage fee?
That’s what I suspect.
This was E-Trade and it shows no commission — plus they don’t charge for Treasury auctions. However a $25 dollar commission would make the math come out so I suspect a mistake on their part. Looks like some other people had the same problem. I have notified them of the discrepancy and await their reply.
My only experience in buying at auction through a brokerage is at Vanguard, which seems very straightforward. Vanguard reports the price as the “unadjusted price,” then lists the adjusted principal, and then what you paid. Commission is listed as $0.00. The accrued interest is listed separately, and I think that is right, since the money will be returned to you at the next coupon payment.
I participated in this auction, and I’m trying to understand the outcome better. When I was submitting the order, there was a message that the order would be executed at average auction price. The execution details show price 101.135096 and yield of 1.379. However, an alert shows executed @ $101.7176 and position shows price paid was also $101.7176. Should I question either the yield and / or the price paid with my broker, or do these seem reasonable? Thanks.
Same for me Mary. I believe this is an error. Were you using E-Trade? See discussion in this thread.
Yes, Paul. I actually used two different brokers for this auction, but what I described above was for E-Trade. I’ve called them twice and submitted a trade inquiry in writing. They were going to escalate it to “pricing” to look into. I am awaiting their call back.
Thanks for creating this site and sharing your knowledge. I am in and confident this offering beats the 2.26 inflation for the next +4 years
my question is does it mature on october 15th or october 22nd 2027?
It matures Oct 15 2027
I am struggling with pricing. You state that the unadjusted price was about 100.56 for $100 of value. Where did the 100.56 come from? Further, the adjusted price was about 101.14 for 100.58 of value. Where did 101.14 come from? I think the 101.14 was driven by market forces; it is very close to the number asked for by sellers prior to auction.
You are just amazing and this website is amazing too. Thank you so much for all you do.
Three things create the adjusted price for this TIPS: 1) The real yield of 1.504% was below the coupon rate of 1.625%, so that meant a higher price: about $100.55 for $100 of value. 2) Investors were purchasing the additional principal that has built up since the original auction. The inflation index will be 1.00576 on the settlement date, meaning investors are purchasing about 0.58% extra principal at that higher price. So principal of $100.58 x 1.0055 cost = $101.13 adjusted cost (roughly). Plus 3) the investor will be paying for about 30 cents per $100 for interest earned from October 15 to December 30.
Thank you so much for this explanation! Would it be possible to present the final estimated price and all of its components? I didn’t understand pricing and underestimated the funds required to purchase this TIPS in my Vanguard IRA. I was in the red a small amount. Fortunately, I had cash in another Vanguard traditional IRA account and was able to take care of the shortfall.
On Tuesday morning I will be publishing an article that explains the TIPS terminology. I also have a TIPS Q&A with some of this information: https://tipswatch.com/why-tips/
Thank you David! I was hoping for detailed formulas, inputs needed, and where one would go to get the inputs.
When I called Fixed Income customer support at TD Ameritrade yesterday, he could not answer my question. You explained well. Today’s confirmation showed price of 100.55589. Did I overpay a little? Thanks alot.
Am I misunderstanding what “Allocated at high” means? I thought it was the pro-rata amount awarded to competitive bidders whose offer was at the tipping point, which to me doesn’t seem like all that meaningful of a number to compare auction-to-auction.
You might be right that it’s not significant, but the variance made me curious.
Thanks for your great explanations of TIPS. I am very new to the math behind TIPS. How do we know if we will get the 1.504% high yield or something lower? How do we tell from our brokerage transaction execution details? How to calculate? Additionally, what values (Cost of Par Value or Inflation Adjusted Value, etc.) do we use to calculate our actual costs and returns? Thx.
If you placed a non-competitive bid (nearly 100% certain you did) you get the 1.504% high yield. Non-competitive bids automatically get the high yield.