By David Enna, Tipswatch.com

The aftermath of last week’s mild inflation report has sent both nominal and real yields tumbling, with the yield on a nominal 10-year Treasury falling about 30 basis points since July 7 and the real yield on a 10-year TIPS down 27 basis points over that same time.

So, where do we stand heading into Thursday’s Treasury offering of $17 billion in a new 10-year TIPS, CUSIP 91282CHP9? This is a new TIPS, so both the coupon rate and real yield to maturity will be set by the auction results.

The Treasury’s Real Yield Curve page closed Friday with the 10-year TIPS yielding 1.59%, among the lowest yields we’ve seen for this term since mid June. So, this auction of a new TIPS — which looked like a stellar opportunity a few days ago — now looks “ho-hum”? No. I’d say it still looks solid.

There’s no way to know where real yields will be heading by Thursday, but 1.59% remains attractive, in my opinion. Here is the 10-year real yield trend over the last 13 years:

If the auctioned real yield can remain at 1.59% (or higher), this TIPS would end up with the highest real yield of any auction of this term since July 2009. (There have been 81 auctions of this term since then.) That level of real yield would also set the coupon rate at 1.50%, a level we haven’t seen since an auction in October 2009.

Plus, this is a new TIPS, which means:

1. The investment cost should be very close to par value, giving the investor near-total protection against deflation for the original investment. (Par value is guaranteed to be returned at maturity, even if severe deflation strikes. Is this a big deal? Not really, but it is reassuring to a lot of investors.)
2. The coupon rate — whether it is 1.375% or 1.50% — will add further protection, since the coupon rate is paid as current income.
3. This TIPS will mature on July 15, 2033, and will be the last TIPS currently available before the TIPS “gap years” of 2034 to 2039, years where there are no maturing TIPS. If you are building a TIPS ladder, adding to your 2033 holdings makes sense.

I have had this TIPS penciled in as a “buy” for many months, for all of these reasons. Is it right for you? That’s a personal decision. Plus, it will be smart to watch where real yields are heading before Thursday.

Pricing

I am writing this Friday morning because I will be traveling Saturday. It looks like TIPS yields might be stabilizing today, but that’s not certain. I usually write my auction previews after the Friday’s market close.

CUSIP 91282CHP9 will have an inflation ratio of 1.00130 on the settlement date of July 31. That means an investor buying $1,000 par will be getting $1,001.30 in principal on the settlement date. We know that the unadjusted price of this TIPS will be slightly below 100, because the coupon rate will be set to the 1/8th percentage point below the auctioned high yield.

Add those two factors and you get a price very close to $100 for $100 of par value + 13 cents of accrued principal. Accrued interest should be about 62 cents per $1,000 of value. This is one of the advantages of buying a new TIPS at auction: the pricing can be pretty clear-cut.

Inflation breakeven rate

With the 10-year Treasury note closing Friday at 3.83%, CUSIP 91282CHP9 at this point would get an inflation-breakeven rate of 2.24%. That is very close to the breakevens of recent auctions of this term. It seems reasonable, although it remains higher than the Fed’s long-term inflation target of 2.0%.

Here is the trend in the 10-year inflation breakeven rate over the last 13 years:

This chart shows that inflation expectations have been gradually moving lower since the Federal Reserve began aggressively raising interest rates in spring 2022. A rate of 2.24% remains “high-ish” by historical standards, but sensible in a time of inflation uncertainty.

Final thoughts

Since this is a new TIPS, there isn’t a secondary market option as an alternative. The closest in maturity is CUSIP 91282CGK1, which matures in January 2033. It was closed Friday with a real yield of about 1.60%, close to the Treasury estimate.

Some investors don’t like the uncertainty of buying at auction, since the real yield won’t be known until 1 pm Thursday and things can — and do — change. But a bidder at auction automatically gets the high yield no matter the size of the investment. For a small-scale investor, that is a plus.

I like the idea of loading up on longer-term TIPS at these real yields, so I will be a buyer, unless things change drastically.

If you are pondering an investment, keep an eye on Treasury’s Real Yields Curve page, which updates at the market close each day. It is a pretty accurate indicator of where real yields are heading. Thursday’s auction will close at 1 pm ET. 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.

When the auction closes, I will be in Germany (7 pm local time) and I can’t be sure when I will be able to post the auction results. And I probably won’t be able to do any complex analysis. The results announcement will be posted on this page at TreasuryDirect by about 1:05 pm ET.

Here is the history of recent TIPS auctions of this term. Note that as recently as November 2021, a 10-year TIPS reopening had a record low real yield of -1.145%. A lot has changed since then:

• 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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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.