By David Enna, Tipswatch.com
A new 30-year Treasury Inflation-Protected Security — CUSIP 912810TP3 — auctioned today with a real yield to maturity of 1.550%, the highest auctioned yield for this term since June 2011.
The auction seems to have attracted lukewarm demand. A 29-year TIPS was trading on the secondary market all morning with a real yield of 1.53% and the “when issued” yield prediction for this TIPS was also 1.53%. The bid to cover ratio was a middling 2.38.
So investors were able to nab a slightly higher real yield, and that’s a good result. The real yield to maturity of 1.55% was the highest for any 29- to 30- year TIPS at auction since June 2011, when a 29-year, 8-month TIPS got a real yield of 1.744%. The Treasury set the coupon rate at 1.50%, the highest for any TIPS since a February 2011 new-issue auction at 2.125%.
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 1.55% means an investment in this TIPS will exceed U.S. inflation by 1.55% for 30 years. If inflation averages 2.3%, you’d get a nominal return of 3.85%, on par with a nominal 30-year U.S. Treasury. But if inflation averages 4.5%, you’d get a nominal return of 6.05%.
Here is the trend in the 30-year real yield since January 2021, more than a year before the Federal Reserve began aggressive moves to increase interest rates and fight inflation:
Pricing for this TIPS
The unadjusted price was $98.804809 for $100 of value, meaning that investors actually paid less than par value for this TIPS.
The key factors here are that the unadjusted price was about $98.80 for $100 of value and the inflation index on the settlement date of Feb. 28 will be 0.99857. Accrued interest will be about 53.8 cents per $1,000 investment. Here is how the pricing works out:
One note: Anyone who purchased $10,000 in this TIPS got $10,000 in par value, but the actual principal total on the settlement date of Feb. 28 will be $9,985.70, because the inflation index was less than 1.0. This reflects deflation of 0.31% recorded in December 2022. But in March, this TIPS will get an inflation accrual of 0.8%, based on non-seasonally adjusted inflation recorded in January 2023.
Inflation breakeven rate
With a 30-year nominal Treasury trading with a yield of 3.90% at the auction’s close, this TIPS gets an inflation breakeven rate of 2.35%, a bit higher than recent results for this term. In the February 2022 auction for this term, the breakeven rate was 2.11%. Here is the trend in the 30-year inflation breakeven rate since January 2021, showing the fairly strong variations caused by the financial market’s hot and cold opinions of U.S. inflation:
Reaction to the auction
It was a good result for investors, with both the real yield and coupon rate topping 1.5%, the highest in nearly 12 years. The TIPS market seems to be reacting with a yawn, with the TIP ETF barely nudging higher after the auction’s close. The 30-year maturity isn’t highly traded and makes up only a small portion of the TIP ETF’s holdings. No big deal, it appears.
For people with the fortitude to buy a highly volatile 30-year Treasury, this is an attractive purchase, locking in a yield 1.55% higher than official U.S. inflation over 30 years.
Here is a recent history of auctions of this term:
• Confused by TIPS? Read my Q&A on TIPS
• TIPS in depth: Understand the language
• TIPS on the secondary market: Things to consider
• Upcoming schedule of TIPS auctions
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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.
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Hi David,
Over the weekend, I noticed something peculiar on the WSJ’s current TIPS quotes.
2043 Feb 15 (maturity)
3.875 (coupon)
98.00 (bid)
98.00 (ask)
n.a. (change)
4.019 (real yield)
1292 (accrued principal)
This 20yr (from now) TIPS shows a 4 % real yield ! Whereas, all the other 2043 maturity TIPS (or even any other maturity for that matter) are all hovering between 1.5-1.6%. The short term ones are offering slightly higher yields in 1.8-2.0% range as expected. Given the maturity date and 1.2x inflation factor, I assume this is a 30YR TIPS issued in 2013. But the coupons weren’t this high in 2013, were they ?
And even if it does exist, who is selling it below par with that kind of coupon rate when yields on every other issue are much smaller ?
Is this a mistake on WSJ / their data aggregator’s part ? Or is there really a chance to snag a 15-30YR TIPS with a 4% real yield ?
It’s definitely a mistake. There is no way a TIPS with a coupon rate of 3.875% would have a price of $98 for both bid/ask. And in fact, there is no TIPS maturing in February 2043 with that coupon rate. There is only one TIPS with that maturity, and it has a coupon rate of 0.625%. The only tips with a coupon rate of 3.875% matures April 2029 and its current real yield is 1.594%.
1.55% pales in comparison to the sweet 2% on the 2/43 issue you picked up in the secondary market. Any temptation to take a capital gain yet?
Absolutely not.
Thank you again David. I do wonder about the comparison to a treasury… I may have this wrong, but here’s my understanding: treasury’s get a flat interest rate which is paid out in cash every 6 months – say 3.9% as mentioned above in the break-even rate. For a tip to break even, all that is required is for a single year in the life of the bond to hit that inflation rate – even if the remaining 29 years all have an inflation rate of 0%. Because the treasury interest is only ever calculated on the face value while every inflation rate is compounded and bundled into the factor which affects every interest payment from then on (as well as the amount paid at the end). I do understand that inflation could be declared negative which will subtract from that factor, (but not from the face value at the last payout).
If I have that correct, then it is hard to look favorably on a standard treasury with a fed who have stated they are intent on seeing (at least) 2% inflation…every year!
No, this isn’t right. If a 30-year Treasury is paying 3.9% a year, you receive that 3.9% as current income every year, which you could reinvest. This particular TIPS will pay out 1.5% a year as current income. The coupon rate will always stay the same but the amount paid out will vary with the accrued principal, sometimes down but usually up with inflation. If there is zero inflation after year one, then you just earn 1.5% and your principal balance never grows after the first year.
If inflation rose 2.4% in the first year, on $10,000 your principal would grow to $10,240 and your coupon interest would then be $153.60. If inflation remained at zero for the next 29 years, your annual coupon would remain at $153.60 every year and principal would be just $10,240 at maturity. Meanwhile, the 30-year nominal Treasury would be paying $390 a year, every year for 30 years.
Thank you David (again), I misunderstood the interest payment. I was under the impression that tips paid the coupon plus the inflation amount – 1.5 + 2.4 = 3.9%. Since that’s not the case, I now can’t see how “breakeven” fits in at all. Does it mean “if inflation is 2.4% for every year of the bond’s life” ?
Elizabeth, yes, the breakeven rate is for average annual inflation over the 30-year term.
I was a buyer in the auction. Question (as my first time buying) — do you always get the high yield for these auctions as a noncompetitive bidder? There is also a median yield in the auction report reported on the treasury info so I wasn’t sure.
Yes, non-competitive bidders always get the high yield. (So do all winning competitive bidders.)
I buy Treasury bills at auction. I get the “Investment Rate”, which is quite a bit higher than the “High Rate”, and of course a lot higher than the “Median Rate” and “Low Rate”.
Tips have a different terminology with results called “Interest Rate”, “High Yield”, “Median Yield”, and “Low Yield”.
Funny the way government does stuff.
small typo: ” Jan. 31 will be 099857″ should be “Feb 28 will be 0.99857”
Got it. Thanks for the alert.