By David Enna, Tipswatch.com
After a week of declining yields in the Treasury market, a new 10-year TIPS auctioned Thursday with a real yield to maturity of 1.22%, a bit lower than looked likely just before the auction’s close.
This is CUSIP 91282CGK1, and its coupon rate was set at 1.125%, the highest coupon rate for any new 10-year TIPS since an auction in January 2011, which had a surprisingly similar result: real yield of 1.17% and coupon rate of 1.125%. A few months after that 2011 auction, 10-year real yields fell sharply, hitting -0.13% by August 10.
All morning, CUSIP 91282CGK1 looked likely to get a real yield of about 1.24%, and the “when issued” premarket was set at 1.26%. So the result of 1.22% appears to have been caused by high investor demand. The bid-to-cover ratio was set at 2.79, well above any recent auction of this term.
Definition: The “real yield” of a TIPS is its yield above official future U.S. inflation, over the term of the TIPS. So a real yield of 1.22% means an investment in this TIPS will exceed U.S. inflation by 1.22% for 10 years. If inflation averages 2.2%, you’d get a nominal return of 3.42%, on par with a nominal 10-year U.S. Treasury, currently 3.42%. But if inflation averages 4.5%, you’d get a nominal return of 5.72%.
This new 10-year TIPS is a bit unique because it auctioned with an adjusted price below par value, which is fairly rare for a new offering. The details:
The key factors here are that the unadjusted price was $99.11 for $100 of value and the inflation index on the settlement date of Jan. 31 will be 0.99948. Accrued interest will be about 49.6 cents per $1,000 investment. Here is how the pricing works out:
Inflation breakeven rate
With a 10-year nominal Treasury note trading with a yield of 3.42% at the auction’s 1 p.m. close, this TIPS gets an inflation breakeven rate of 2.20%, just slightly higher than the market rate earlier in the day. This is the lowest auctioned breakeven rate for this term since January 2021. I’d say this is an attractive rate, making this TIPS appealing versus a nominal Treasury.
Reaction to the auction
This one was a bit ill-fated, with a slew of economic reports arriving this week pointing to a downturn in the economy. That is putting more pressure on the Federal Reserve to call a halt to its current hawkish interest rate increases. But a lot of this sentiment is cyclical. We could see rates rising next week. Or maybe falling.
As I have noted before, this is only the fifth TIPS auction of this term since January 2011 to get a real yield to maturity higher than 1%. There have been 72 auctions of this term over that time span, so today’s result is welcome, even if real yields dipped a bit in the closing hours.
This chart shows the market’s quick reaction to the auction’s close at 1 p.m. ET, with the broad-based TIP ETF surging higher in reaction to the apparently strong demand.
I know a lot of new TIPS investors jumped aboard this auction, and I want to reinforce my view that the result was positive for investors: A rare real return on your money surpassing 1.2%, over 10 years, while also priced slightly below par value. Of course, there will be two more reopening auctions of this issue — in March and May — and then a new 10-year TIPS will be auctioned in July. So more opportunities to come.
Here are auction results for this term over the last five years:
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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.