Note: The auction will close Tuesday at 1 p.m. because of the Thanksgiving holiday.

By David Enna, Tipswatch.com

We’ve seen pretty dramatic swings in both real and nominal yields over the last 2 1/2 months, as Federal Reserve officials wavered from hawkish to dovish to “let’s pretend to be hawkish.”

A key event in this volatility came Tuesday with a fairly mild U.S. inflation report, with annual all-items inflation falling from 3.7% in September to 3.2% in October. That sent bond yields plummeting and gave both the stock and bond markets a reason to celebrate. For the week, the S&P 500 was up 2.33%, the total bond market was up 1.39%, and the TIP ETF rose 0.85%.

But, as you can see in the chart of 10-year real yields, the yields remain about 24 basis points higher than they were on September 1. In other words, still attractive.

A Tuesday TIPS auction

All this points toward Tuesday’s $15 billion reopening auction of CUSIP 91282CHP9, creating a 9-year, 8-month Treasury Inflation Protected Security. This is a rare Tuesday TIPS auction (not Thursday as usual) because of the Thanksgiving holiday.

The coupon rate for 91282CHP9 was set at 1.375% by the originating auction on July 20, 2023, which generated a real yield to maturity of 1.495%. That is 67 basis points below the current market, an indication of the huge swings we’ve seen in the last half of 2023.

This TIPS had a reopening auction on September 12, when it got a real yield to maturity of 2.094%, much closer to the current market.

Since this TIPS trades on the secondary market, you can check its current real yield and price in real time on Bloomberg’s Current Yields page. As of Friday’s close it was trading with a real yield of 2.16% and a price of 93.20, a deep discount because of the large spread between the market real yield and the coupon rate.

Is a real yield of 2.16% historically attractive? Yes, it is. Since January 2008, there have been 89 TIPS auctions of this term and only one — the most recent in September 2023 — got a real yield above 2.0%. Here is the 10-year real yield trend going back to 2010, showing the steep climb higher since summer 2023:

Pricing

CUSIP 91282CHP9 will have an inflation index of 1.01335 on the settlement date of November 30 and it currently trades at a price of 93.20. With that information, we can get a decent estimate of the cost of this investment at Tuesday’s auction. I am using an example of a purchase of $10,000 par at the auction:

• Par value: $10,000
• Adjusted principal = $10,000 x 1.01335 = $10,133.50
• Cost of investment = $10,133.50 x 0.9320 = $9,444.42
• Plus, cost of accrued interest, probably about $45.

To boil this down: an investor buying $10,000 par will pay $9,444.42 for $10,133.50 of principal and then will receive inflation accruals and a coupon rate of 1.375% for the next 9 years, 8 months. The accrued interest will be returned at the first coupon payment. (Of course, pricing will change by Tuesday depending on market conditions.)

This auction should appeal to investors who want to pay below par value to ensure deflation protection through maturity for the original par value, in this case $10,000. I don’t think this is a major issue, but some investors do.

Inflation breakeven rate

With the 10-year Treasury note currently offering a nominal yield of 4.44%, this TIPS with a real yield of 2.16% would have an inflation breakeven rate of 2.28%, a bit below recent auctions of this term. That is a plus. If you think inflation will average more than 2.28% over the next 9 years, 8 months, 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:

It is fascinating to see how these inflation breakevens have settled into a range of 2.1% to 2.5% for a full year. This seems to show investor confidence that longer-term inflation has been tamed. (I am not so sure.)

Auction thoughts

This is an attractive offering, but of course if you want to avoid the too-typical “auction disappointments” of 2023 you can buy CUSIP 91282CHP9 on the secondary market — either before the auction after after.

Eventually, we are going to get an attractive auction result and I am hoping that will come Jan. 18, 2024, with the auction of a new 10-year TIPS to mature in January 2034. This one is attractive to me because I want to add a TIPS maturing in 2034 to my ladder of investments. And so … I am waiting until January and I won’t be a buyer at Tuesday’s auction.

If you are pondering an investment at Tuesday’s auction, keep an eye on Bloomberg’s Yields Curve page. This updates in real time and should provide a fairly reliable estimate of the potential auction result.

The auction closes at 1 pm ET. Non-competitive bids at TreasuryDirect must be placed by noon Tuesday. If you are putting an order in through a brokerage, make sure to place your order Monday or very early Tuesday, because brokers cut off auction orders before the noon deadline. I hope to post the results soon after the close on Tuesday.

Here is a recent history of 9- to 10-year TIPS auctions. Note that just two years ago, on Nov. 18, 2021, a 10-year TIPS reopening got a real yield of -1.145%, the lowest in history for this term:

• Now is an ideal time to build a TIPS ladder

• 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.