By David Enna, Tipswatch.com
The U.S. Treasury just reported that its offering of $15 billion in a reopened 10-year TIPS — CUSIP 91282CGK1 — generated a real yield to maturity of 1.182%, a bit higher than expected.
This TIPS has a coupon rate of 1.125%, and it was trading on the secondary market with a real yield of 1.15% in the hour before the auction closed. So it looks like demand was weak for this offering. The bid-t0-cover ratio was 2.28, well below the originating auction’s 2.79 on Jan. 19, 2023. That January auction drew high demand; but demand for this reopening looks pretty weak.
Here is a chart of the 10-year real yield over the last 13 years, showing that today’s yields remain high based on historical trends:
This TIPS will have an inflation index of 1.00409 on the settlement date of March 31. Investors paid an unadjusted price of about 99.473545 for $100 of par value. The adjusted price, which includes the inflation accrual, was 99.880392.
This means an $10,000 par investment in this TIPS was actually purchasing $10,040.90 of principal, at a cost of $9,988.04. One positive point is that investors paid below par value for a higher amount of principal. The value of a TIPS investment can never fall below par value at maturity, even in a time of severe deflation.
Plus, this TIPS will pay a coupon rate of 1.125% for the next 10 years.
Inflation breakeven rate
At the auction’s close, a 10-year nominal Treasury note was yielding 3.44%, creating an inflation breakeven rate of 2.26% for this reopened TIPS. This looks like a reasonable number, a bit below most recent auctions of this term.
Here is the trend in the 10-year inflation breakeven rate over the last 13 years, showing the recent decline in inflation expectations as the Federal Reserve continues increasing short-term interest rates:
I arrived at a hotel in Athens, Greece, about 10 minutes before this auction closed. I am pleased I was able to post this abbreviated version of my usual auction report. Now I am off to dinner (it is 7 p.m. Athens time.) If you invested in this TIPS, please post your reactions and thoughts in the comments section below.
From today’s Reuters report:
The Treasury Department saw slightly soft demand for a $15 billion sale of 10-year Treasury Inflation-Protected Securities (TIPS) on Thursday. The debt sold at a high yield of 1.182%. Demand was below its recent average at 2.28 times the amount on offer.
Here is a recent history of auctions of this term:
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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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“I Bonds purchased before May 1 will offer an annual return of 5.34%”. Should this not be 5.41%? (1+.0689/2)(1+.0379/2)
I suppose technically it is 5.40% due to the weird $25 rounding rules.
But my point is that the rate for one year is
(1+r1/2)(1+r2/2) – 1
r1/2 + r2/2
(in both cases r1 and r2 are decimal representations of the rates as is the result)
because of the compounding between six month periods.
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I purchased this at the original auction in January, and was quite pleased. Now I have the upcoming 5-yr TIPS auction on my watchlist for April. Another Treasury investment that I’d like to see more media coverage on is MBS. Supposedly they average about .50 bps more than nominal Treasurys, and are attractively priced right now. I know it’s off your beaten path, but I would love to see you author a primer on MBS. Thanks again for all your dedication to us retail investors!
^sorry I meant “other govt. agency investments,” not “other Treasurys.”
I bought this 2033 TIPS both at its original offering in January and its reopening yesterday. As the reopening offered a better YTM than the original, I am especially happy with my recent purchase.
I too want to thank you for your commitment to explaining TIPS to DIY investors. You have given me the confidence to wade into the auction and secondary markets over the past several months.
Please do enjoy your vacation!
The real yield at the original offering in January was 1.22% and now the reopening’s real yield is 1.182%. Isn’t that the same as YTM?
Yes, it is the real yield to maturity.
Thanks, not to nit-picked, but isn’t the reopening worse than the original opening? I just want to make sure I understand this stuff.
Max, you are correct that the real yield to maturity was slightly higher in the originating auction.
Bought this one in the initial offering; added a bit more with this reopening auction. I have purchased TIPS in secondary market many times to build out a maturation ladder, but auctions are a great time to remove any doubt about the bid/ask ambiguity – so it’s really only a matter of the amount I purchase at each 5 and 10 year TIPS auction.
I always appreciate and learn from your work. Even better, it’s great to see you enjoying travel. Best wishes and thank you.
WOW, what dedication (or compulsion). Appreciate your dedication.
Taking a pass on this auction and will follow in secondary market for better terms. Thank you Mr. Enna for your invaluable posts.
Thank you for your posts and your website. With Tips becoming more interesting, your site has provided useful education to help a beginner evaluate and participate in this and recent Treasury Tips auctions. Next step is to educate myself even further to see if secondary market small lot Tips purchases are worth the effort to fill in a bond ladder. Thanks again and hope your trip goes well.
Thank you for thinking of your readership while on vacation, and taking time to post your thoughts so soon after auction completion.
Due to comparatively lower yields, initially I was hesitate to participate in today’s auction, but my gut kept telling me that there is a real possibility of real yields tanking very soon given events over the past 10 days or so.
I was able to get through the phone tree to the fixed income desk at the broker for my self directed retirement account…and felt fortunate to get my order placed at 9:50 am (deadline turned out to be 10:30). While the yield isn’t as attractive as in the months prior, I still feel good about 1.182% over inflation for this portion of my portfolio, whose purpose is to hedge against unexpected inflation.
Thank you for all you do to teach so many of us about TIPS! I feel fortunate that I’ve been able to participate in building a ladder these past months due in large part to your informative site.
Enjoy the remainder of your vacation!
I bought this CUSIP at its original offering, so yesterday I bought a 3-year TIPS on the secondary market with a YTM of 1.598% and a break-even inflation rate of about 2.4%. Something I noticed when I was buying it is that the quoted YTM interest rate varied based on the number of bonds I was buying, so I increased my purchase amount to get a higher YTM.
It’s true that small lot purchases (and that can sometimes mean less than $100,000) will get a slightly lower real yield than you see quoted. But the difference is usually 10 basis points or less, so not a huge deal. One advantage of buying at auction is that the minimum purchase is only $100 and the increments are $100, plus you always get the highest yield as the auction result. The advantage of the secondary market is you know exactly the yield you are getting.
For non-competitive bids, the minimum is $1,000 at TD Ameritrade.