But be prepared for another wild week.
By David Enna, Tipswatch.com
I know how disappointing it can be to be waiting to pull the trigger on an investment in a Treasury Inflation-Protected Security, only to see real yields slide lower, making that TIPS less attractive.
It happens. And that’s why I think it is a sensible strategy to make investments regularly as long as real yields are historically reasonable. And that brings us to CUSIP 91282CGK1, which will be reopened at auction on March 23, creating a 9-year, 10-month TIPS. The Treasury is offering $15 billion of this reopened TIPS.
Two months ago, on Jan. 19, this TIPS had an originating auction that generated a real yield to maturity of 1.22%, a bit disappointing. But then real yields started climbing, with the 10-year real yield hitting a year-to-date high of 1.66% on March 8, making the upcoming March 23 auction look highly attractive.
And then, a day later, we got a banking crisis and a Federal Reserve bailout, sending real yields plummeting. The smoke hasn’t cleared, but as of Friday’s market close, CUSIP 91282CGK1 was trading with a real yield to maturity of 1.33%, down about 33 basis points in a week but still 11 basis points above the yield of the Jan. 19 originating auction.
So, despite the turmoil, CUSIP 91282CGK1 still looks like a perfectly acceptable investment, in my opinion. Of course, we’ll have to wait to see how the bond market roils in coming days. This is a time of high volatility.
One thing to be aware of (or … should I say beware of?) is that the Federal Reserve will make an interest rate announcement Wednesday at 2:15 p.m. ET and also announce its future rate forecasts. Odds are that the Fed will opt to continue 25 basis-point increases, but this is highly uncertain. The announcement and forecasts come less than 24 hours before the TIPS auction closes at 1 p.m Thursday. Things could get shaken up.
If you are interested in investing in CUSIP 91282CGK1, you can check its current real yield in real time on Bloomberg’s Current Yields page. This data won’t perfectly predict Thursday’s auction result, but it should end up reasonably close.
Here is the trend in the 10-year real yield from the beginning of 2019 (at the end of the Fed’s last tightening cycle) to March 2023 as the Fed continues its newest tightening cycle:
Here’s the point: As long as 10-year real yields sustain above 1%, they remain attractive as an investment. We can’t know the direction of future interest rates. But current rates are at least historically attractive.
Update on pricing
I just checked Monday morning (Montenegro time) and CUSIP 91282CGK1 was trading with a real yield of 1.24% and price of 98.99 for $100 of value. This TIPS will have an inflation index of 1.00409 on the settlement date of March 31. So an investor purchasing $10,000 in par value will be actually buying $10,040.90 of accrued principal. Apply a price of 0.9899 and you get a total cost of $9,939.48. Of course, this will change before Thursday’s auction close.
Inflation breakeven rate
With the 10-year Treasury note closing Friday with a nominal yield of 3.43%, CUSIP 91282CGK1 currently has an inflation breakeven rate of 2.1%, lower than recent trends. In fact, it seems remarkably low at a time when U.S. inflation is sustaining at 6.0%.
This breakeven rate means that the TIPS will outperform the nominal Treasury as long as inflation averages more than 2.1% over the next 9 years, 10 months. Over the last 10 years, U.S. inflation has averaged 2.6%.
Here is the trend in the 10-year inflation breakeven rate over the last three years, showing that 2.1% looks reasonable when compared with the recent trend line:
Final thoughts
I am writing this on Saturday afternoon in beautiful Dubrovnik, Croatia (a nation where annual inflation is currently running at 12%). This is another reminder that inflation is a global issue, not caused — or solved — completely by U.S. policies. Because of this trip, I decided to skip this TIPS reopening auction. Instead, 10 days ago I bought a TIPS on the secondary market, maturing in January 2032. I nabbed a real yield of 1.66%. Now it is trading at 1.29%.
That was luck, not investing skill. But the lesson was to take advantage of favorable real yields when you see them. If 10-year real yields hold around 1.3% before Thursdays auction, I think CUSIP 91282CGK1 will be an acceptable addition to your TIPS collection.
And yes, I did buy CUSIP 91282CGK1 at the originating auction with a real yield of 1.22%. That one wasn’t so lucky, but it was fine. It all balances out.
If you are considering bidding at Thursday’s auction, I urge you to keep an eye on Bloomberg’s Current Yields to track the yield trend. Non-competitive bids at TreasuryDirect must be placed by noon Thursday. If you are putting an order in through a brokerage, make sure to place your order Wednesday or very early Thursday, because brokers cut off auction orders before the noon deadline.
I’ll be posting results sometime Thursday (I hope), but because of iffy internet on this trip, it will be impossible to predict when. Here’s a history of 9- to 10-year TIPS auctions back to 2019:
* * *
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 
Does one lose money when you reinvest in a short-term t-bill (26 weeks or less) if the interest rate on the reinvestment is lower than the original rate?
No. You can never lose money if you hold a T-bill to maturity. You would simply earn less on the next investment.
Thank you for your prompt response.
The 10 year is dropping fast, now at 1.18.
Another very informatve and timely post, thanks to David and all those with their useful comments. I am also for the May auction. For the Secondary market buys, I use Bloomberg page to track realtime TIPS current real yield and then buy on Schwab or Fidelity platforms. I am a bit of a novice in buying TIPS in the secondary market. Please let me know if there is a better way…thanks!!!
Yes, $50 5GB T-Mobil card is very useful. Our daughter and her husband used it recently in Bali, Indonesia.
Have a link for this 5GB plan with overseas coverage (aka international data roaming)? This link https://prepaid.t-mobile.com/plan-detail/mobile-internet appears to indicate there is no international data roaming…
Great column, David thank you so much.
I do not like the stock market, I think it is too much of a fairy tale and fear that at some moment it could burst when it stops to follow CNBC or brokers advise to always buy into it because of historical returns.
Anyhow even though I very much like TIPS and Ibonds I consider that with this high inflation it is still a loosing money tipe of financial instrument if we consider taxes.
I might be wrong but if we consider 6% inflation and a real rate of 1.31% in the 10 years TIPS, and we deduct the taxes, we would end up with an under -inflation real rate after tax as long as we consider a tax rate over 20% (6%+1.31% minus 20% tax= 5.848%), meaning your money would have had depreciation in the long run (I am not considering compounded interests but would not make much of a difference).
I would appreciate your comments on this.
I’d agree on taxes, if inflation remains at 6%+. But if inflation runs at 3% or less, then that 1.3% bonus over inflation should cover taxes.
I’m not a mathematician but I guess you have to divide the inflation rate by (1-tax rate) and substract the inflation rate to know if the real yeal is enough to cover for the taxes that precise year. The equation ((Inflation Rate/(1-Tax Rate)-Inflation Rate) should be greater than the Real Rate (bonus) to cover for taxes. In this example above, with 6% inflation and a tax rate of 20% the real rate (bonus) should be greater than 1.5%; (6/(1-0.2))-6=1.5%. After this first year if inflation would go up you would get depreciation (a little bit) on your money after taxes and if it went down you would make money after considering inflation and taxes.
Perhaps wait for the May 10 year TIPS?
Perhaps.
I am just curious why you want to wait?
What do you expect in the next 2 months?
Have you consider buy half this month and half in May to spread out whatever risk you are considering?
Wuma: Some say buy now at this Thursday’s auction because they believe (for whatever reason) that real yields may go down in the future. Others say buy on the secondary market because either: 1) they believe (for whatever reason) real yields may go up in the future, and/or 2) they want to “know” the yield they are getting (which is unknowable if you buy at auction, and perhaps more of a gamble than usual this week because yields have been fluctuating so dramatically in recent weeks).
The current real yield (after inflation) at close today (3/21) is 1.35%, which is lower than its peak in recent weeks, but high by recent historical standards. And with an unpredictable Fed meeting tomorrow, a lot could happen between now and Thursday’s auction.
To buy at auction, you either need to place your order tomorrow (Weds) or very, very early on Thursday morning.
David is traveling now, and that’s perhaps why he hasn’t responded to your question. But FYI, what David has always recommended is to check the current yield (in this case on 10-yr TIPS) before placing an order, to give you an idea of the current real yields at the time you make your decision. Current yields can be viewed at:
https://www.bloomberg.com/markets/rates-bonds/government-bonds/us
I’m on the west coast, so i always place my auction orders the night before the auction (not at or before sunrise on Thursday to meet my brokerage’s deadline). I check the real yield after the close on Wednesday eve, and if i’m comfortable with that yield, i go ahead and place an order. The real yield at Thursday auctions is “usually” pretty close to the real yield listed on Weds eve, but it’s never guaranteed. (It’s sometimes a bit higher, and sometimes a bit lower.)
In this case, if the real yield remains in the ballpark of 1.35% after tomorrow’s close (after the Fed announcement, and market reaction to that announcement), i’d have little hesitation to go ahead and order some if i needed to fill in my TIPS ladder for this maturity. But in my case, i’ve already sufficiently filled my TIPS ladder for this maturity, so i’ll probably skip this auction, unless the real yield skyrockets after tomorrow’s Fed announcement to a level that i just can’t resist.
I hope this helps you make your decision.
Thanks for this comment. My internet connection the last two days has not allowed me to post or respond.
Thank you for update and international inflation reminder during your business/vacation trip. congratulations on the 1.66% secondary market purchase.
I would recommend you get a T-Mobile subscription. Croatia is a covered country to get 5GB of high speed internet for a month. You don’t get cut off after using up the 5GB, it just slows down. I travel a lot and this is one feature I like the most. They were the most accessible connection since they were called VoiceStream (one of the first GSM providers in the US) back in the 1999 time frame. I’m not a paid shill, just a big user.
We’ve used T-mobile for years and the international service is a huge plus. We’re now close to the 5G limit, though.
Wow, lots of potential volatility during the day of the upcoming auction. Wouldn’t it make more sense to wait and perhaps purchase this TIP in the secondary market when the yield is known?
That could work either way, up or down. I’m not a fan of volatility right before auctions, though.
I’m thinking the 10 year is too volatile to put in an order not knowing the yield. I went light on the January auction and was happy to pick up more at higher yields in Feb/March.
I agree. With volatility this high it seems to be worth the effort and FOMA of haunting the secondary listings in hopes of snapping up a much higher real yield. With real yields at the ask bouncing up and down 5 or 10 basis points over a few minutes the bid-ask spread is swamped by the volatility.
I bought a bit at the opening auction and two more bits in February and have a cost-weighted average real yield of 1.4%; I’m sure if you waited until March you have an even better yield.