By David Enna, Tipswatch.com
After another day of turmoil in financial markets, real yields slipped lower Wednesday heading into Thursday’s originating auction for CUSIP 91282CGK1, creating a 10-year Treasury Inflation-Protected Security.
A lot happened, I guess. I was out of the house all day today and couldn’t follow financial developments. But here is the gloomy collection I could gather from Bloomberg’s afternoon report:
- Growth in producer prices slid more than expected last month.
- The drop in retail sales exceeded estimates.
- Business equipment production slumped.
- Microsoft Corp. plans to cut 10,000 jobs.
- Bank of America started telling executives to pause hiring.
- Crypto firm Genesis Global Capital is laying groundwork for bankruptcy.
- The S&P 500 fell 1.6% in the day’s trading.
- And … bonds rallied as yields fell in line with fears of recession.
That’s a lot to digest. The nominal yield on a 10-year Treasury note fell 16 basis points to 3.53%, according to Treasury estimates. And the real yield of a 10-year TIPS dropped to 1.25%, down 11 basis points in one day. On the secondary market, the real yield of the most recent 10-year TIPS fell to 1.23% in late trading, according to Bloomberg’s Current Yields.
It’s interesting that the market has decided to place the 10-year TIPS at the lowest point of the yield curve. On the other hand, this is the “sweet spot” of TIPS investing, and the term that is in highest demand.
So what’s ahead?
My crystal ball has become very cloudy and I have no idea where tomorrow’s 10-year TIPS auction is heading. But I went ahead and placed a brokerage order to purchase this TIPS.
As I have noted before, I am looking to fill the 2033 slot in my TIPS ladder. I looked at that ladder this afternoon. It has 18 TIPS issues with maturities from April 2023 to February 2043. Of those 18, only six were purchased with a real yield higher than 1%. CUSIP 91282CGK1 is going to be the seventh.
Better opportunities may be coming later in 2023, and I will add to my holdings if I see the chance. It looks like tomorrow’s auction will end up with a real yield somewhere around 1.25% and a coupon rate of 1.125% to 1.25%. But nothing is certain.
I will be reporting the auction results soon after the auction closes at 1 p.m. ET.
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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.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. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They 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 
I am 75 now and hesitant to buy out further then 5 years. I notice you are buying TIPS much further out there.
I’ve limited the TIPS purchases out to April 2027. I fully intend to live further out then that date 🙂 . TIPS represent about 30% of my fixed income with another 18% in iBonds maturing in 2031. So my inflation protected is currently about half of FI. What do you think of just setting a 5 year limit for TIPS? Short sighted?
P.S. Enjoying your articles
I am going to be 70 later this year and I plan to live to … ??? Anyway, my wife will make it to 95, easy. The 5-year real yield is the highest on the yield spectrum right now, and so I do think the 5-year is the most attractive TIPS at the moment.
I understand your concern. Nevertheless, I’m buying on today’s auction for the TIP that will mature two weeks before my 91st birthday. I started building a ladder shortly after TIPs became available. I’m not sure how many more rungs, if any, I’ll add. They have been a source of comfort as part of my fixed income allocation. No regrets!
Given that TIPS yields took a sizable step down today, is there an advantage of buying this TIPS at auction tomorrow, versus waiting to buy them on secondary market in a few weeks if I believe that TIPS yields will be higher in the near future than tomorrow? Further, inflation adjustment will be negative for rest of January (remaining day of -0.1% total) and February (-0.31%). So even if YTM is the same in a few weeks, buying on secondary market could be cheaper than at auction tomorrow. What am I missing?
Buying now or waiting is the gamble every investor makes, on every investment. Yields could go up or down, and we have been experiencing a lot of volatility the last two weeks. The one advantage of a non-competitive bid at auction is you automatically get the highest yield the Treasury had to accept to complete the auction. But that’s basically the market yield, with some minor adjustments based on the Jan. 31 settlement date and the amount of new TIPS being issued.
I’m waiting (for higher rates) we seem to be in a risk-off phase, flight to quality. Not that I was going to buy quantity anyway.
So…perhaps another dumb question… If the 10 year inflation break even rate is 2.12% and the real yield for the 10 year TIPS is 1.125 to 1.25%, why isn’t this issue a good buy? It seems a reasonable bet that inflation is going to run higher than 2.12% for most of the next 10 years.
Not a dumb question. Totally logical. In the case of the breakeven rate, you are just measuring a TIPS against its nominal counterpart. There are other investments out there (stocks, bonds, gold, real estate). I like having guaranteed inflation protection in my portfolio, so TIPS make sense for me.
Hi Dave,
Thanks so much for the reply! I am still considering purchasing this through Vanguard. I can place an order after hours. I am a TIPS newbie for sure!
I don’t really need a TIPS ladder. I was just wanting some inflation protection in my bond holdings. Your thinking that this isn’t a good deal is based on the fact that you expect other 2023 TIPS offerings will have higher yields than 1.125 to 1.25%?
What is a good real yield? I guess your point is that other investment vehicles have real yields that are often greater than this TIPS offering. What economic situation would this particular TIPS do well in relative to other investments? Unexpectedly high inflation and holding the bond to maturity to avoid interest rate increase impacts (i.e. the current situation!)?
And as I noted, I will be a buyer at this auction. A real yield above 1% is desirable.
Unrelated question: is threat of debt ceiling not being raised and US defaulting on debts mean one should not buy treasury bills, i bonds or TIPS til issue is resolved?
I’d say no. If the issue is not resolved, every investment you own is going to be affected — stocks, bonds, pensions, Social Security, etc.
But it could drive up rates temporarily in the short term (and create a buying opportunity) as the politicians engage in brinksmanship and the market perception is that the risk is going up.
A default on the debt will not be a short term matter. It will have substantial negative international ramifications. Prioritizing the debt won’t work because all the interconnections between the parts.
Yes, I agree the level of brinksmanship in 2023 will be much worse than in 2011, when this same crisis rocked financial markets. In 2011, the weird after-effect was that Treasury yields plummeted instead of increasing. On June 22, 2011, the 10-year real yield was at 0.82%. It fell to -0.13% by Aug 10, 2011. (S&P downgraded U.S. debt on Aug. 6.)
Another reason not to wait – the market has already priced in the possibility that the debt ceiling will not be raised, you are not the only one considering this possibility. Evidently, the market thinks the risk is low. Do you think you know better than all the big players in the market? Maybe. Also, if an agreement is reached before the deadline, then bond prices could rally and interest rates could fall.
Can you please explain why this is the “sweet spot” in Tips investing even though the real yield has decreased since Sunday? Thanks.
It’s just that the 10-year is by far the most issued and most popular version of TIPS. There are six 10-year TIPS auctions a year, versus 4 for 5-year and 2 for 30-year.
This is likely a really dumb question re: the chart, but here goes: How is a 7-year real yield calculated when there are no 7-year TIPS?
The Treasury just extrapolates from secondary market trading. Its explanation: “These par real yields are calculated from indicative secondary market quotations obtained by the Federal Reserve Bank of New York. … This method provides a par real yield for a 10-year maturity, for example, even if no outstanding security has exactly 10 years remaining to maturity.”
The whole curve is generated from real secondary market yields from the current day at 3:45 PM. On that particular day there are likely no exactly 5-year, 10-year or 30-year TIPS either, even though those are the “auctioned” maturities. Instead there may be a 9-year-9-month maturity bond and a 10-year-3-month maturity bond, etc. from which you can draw a curve and estimate (extrapolate) what a 10-year TIPS would yield today. This is done throughout the maturity range from a few months maturity to 30 years maturity, and they report the yield at the 5-year, 7-year, 10-year, 20-year and 30-year points from a curve drawn between the known values.
I think I’m finally understanding this TIPS thing. The table of REAL YIELDS you show is the REAL portion of what you receive. What determines the INFLATION portion of the return and how often does that change? Thanks in advance for your reply.
Yes, the real yield is the annual yield above official U.S. inflation, over the term of the TIPS. The inflation rate is set by non-seasonally adjusted inflation reported monthly by the Bureau of Labor Statistics. It is applied to the TIPS two months in the future. The Treasury sets a daily inflation index from the monthly inflation. So November’s non-seasonally adjusted inflation sets the daily inflation indexes in January.