By David Enna, Tipswatch.com
The U.S. Treasury on Thursday will auction $15 billion in a reopening of CUSIP 91282CGK1, creating a 9-year, 8-month Treasury Inflation-Protected Security.
Although the Treasury market is filled with uncertainty this month as a debt-limit disaster looms ahead, this TIPS remains an attractive investment. It carries a coupon rate of 1.125%, which was set by the originating auction on Jan. 19, when investors got a real yield to maturity of 1.22%. In its first reopening auction, on March 23, investors got a real yield of 1.182%.
This week’s auction looks likely to get a better result. CUSIP 91282CGK1 trades on the secondary market, and according to Bloomberg’s Treasury Yields listing, it closed Tuesday with a real yield of 1.33% and a price of 99.30 for $100 of value.
Definition: A TIPS is an investment that pays a coupon rate well below that of other Treasury investments of the same term. But with a TIPS, the principal balance adjusts each month (usually up, but sometimes down) to match the current U.S. inflation rate. So, the “real yield to maturity” of a TIPS indicates how much an investor will earn above inflation.
CUSIP 91282CGK1 will have an inflation index of 1.01319 on the settlement date of May 31, so investors at this point would be paying about $100.61 for $101.32 of principal. That’s a rough estimate. The actual yield and cost will be determined by Thursday’s auction.
I was a buyer of this TIPS at the originating auction and I will likely to add to the holding at Thursday’s auction. A real yield around 1.33% — if it holds — will be a decent result. (I won’t make a purchase order until later Wednesday.)
Here’s a chart of the 10-year real yield trend over the last 13 years, showing how aggressive bond-buying by the Federal Reserve suppressed real yields through much of that time:
At this point, even though yields are down from their late 2022 highs, 10-year real yields remain near their highest levels in a decade. This looks like a sensible investment.
Inflation breakeven rate
With a nominal 10-year Treasury note currently trading at 3.53%, CUSIP 91282CGK1 is trading today with an inflation breakeven rate of 2.20%, which seems reasonable. That means investors are pricing in inflation of 2.2% over the next 9 years, 8 months. If you think inflation will be higher, buy the TIPS. If you think it will be lower, buy the nominal Treasury.
Here is the trend in the 10-year inflation breakeven rate over the last 13 years:
Inflation expectations have been sliding lower in recent months, making TIPS a more attractive investment versus the nominal Treasury, in my opinion.
I am writing this Tuesday afternoon from an airport hotel in Quito, Ecuador. In a few hours I will be boarding a redeye flight back to the United States. We’ve been boating, hiking and snorkeling around the Galápagos Islands for the last 8 days. After the first night we had zero internet. Nothing. So I’ll admit I have no idea what is going on in the financial markets.
But it was a relief to see that the TIPS market didn’t go sour in the last week. I am looking forward to Thursday’s auction, which will close at 1 p.m. EDT. If you have updates or opinions on the current financial chaos, post them in the comments section below.
If you are considering bidding at Thursday’s auction, I suggest you 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.
Here’s a history of 9- to 10-year TIPS auctions back to 2019:
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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.
The result of the 9 year 8 month TIPS came out quite good at 1.395%, so things seem better than ok at 99.862 per 100
Yes, not too shabby.
Trying to gauge if it’s better or worse to buy now on secondary market than if one had bought at auction?
Secondary 1.383 YTW so for $30K cost $29,649.48 with $116.98 accrued principal and settlement date 5/19/2023?
Thursday, 9 am update: It looks like real yields are trending a bit higher this morning, with CUSIP 91282CGK1 now trading with a real yield of 1.39%. The auction should be close to that, but unpredictable things happen … https://www.bloomberg.com/markets/rates-bonds/government-bonds/us
Hi David, thanks for another excellent analysis. I am excited about next month’s 5-year auction but reading your take this looks attaractive too. I have the night to sleep over it and decide in the morning. I am intrigued by CME fedwatch to show a high of 24% probability for another 25 bp increase, I will put the probability, even higher, at around 40%. Gone are the days of below 2% inflation, I think next 10 years, 2.5 to 3.00% or higher is my guess, but then no one knows. As was expected, debt ceiling turmoil is noise that will hopefully fade away soon. Redeye can be hard, safe journey and all the best.
What would be the estimated cost of purchasing 10k of this TIPS?
Right now, $10,000 par would cost about $10,061 and you’d have $10,132 of principal on May 31. But that will change a bit by Thursday.
Hello Dana: Have a Safe trip.
I was interested in buying this TIPS within my IRA account and thus not have to deal with the taxes until I redeem it. Unfortunately, Merrill Edge (where My IRA is) does not have an option to purchase new treasuries and while they can do it via phone call they insist on a minimum of $25,000.
I could still buy at auction it either through Fidelity in a regular account or I could buy it via my merrill IRRA in the secondary market after the auction. Any ‘tips”? yeah horrible pun…
This makes Merrill Edge looks pretty undesirable. Could you move some of the IRA money to Fidelity, Vanguard or Schwab and make future purchases there? The secondary market isn’t a bad option, though. This TIPS is trading continuously, so it should be fairly easy to make a purchase any time you see a yield you like
Yes, I was thinking along those lines. I’ll open a Fidelity Roth IRA and move the T-Bills and cash there and focus on the June 22 5 year TIPS Tks.