By David Enna, Tipswatch.com

Real yields have had a bumpy ride over the last several weeks, but as things settle down, it looks like this week’s reopening auction of a 10-year Treasury Inflation-Protected Security could be a promising investment.

This is CUSIP 91282CJY8, and the auction will create a 9-year, 8-month TIPS. Here is the history of that TIPS, which also trades on the secondary market:

• Jan. 18, 2024: The originating auction generated a real yield to maturity of 1.810% and set the coupon rate at 1.75%. The unadjusted price was 99.454975, reflecting the discount investors received because of the lower coupon rate.
• March 21, 2024: The first reopening auction got a real yield to maturity of 1.932% and the unadjusted price for investors fell to 98.380142.
• May 17, 2024: As I am writing this on Friday at 12:20 p.m. EDT, this TIPS is trading on the secondary market with a real yield of 2.09% and a price of 97.07.

So, as I noted, as we head toward Thursday’s auction conditions are looking promising. But there is one problem: Real yields have actually been falling in recent weeks, with the 10-year dropping from its 2024 high of 2.28% on April 30 to 2.07% at Thursday’s market close.

That 21-basis-point drop was triggered by a “fairly” positive inflation report for April, which for the first time in three months matched investor expectations. Real yields initially dipped and then rebounded a bit after that report.

Here is the trend in the 10-year real yield since January 2023, showing that yields remain relatively attractive despite the recent dip, but also well below the highs of October 2023:

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 each year until maturity.

Pricing

CUSIP 91282CJY8 is available to purchase at any time on the secondary market, so there is no compelling reason to wait until Thursday’s auction to pull the trigger on an investment.

The advantage of buying at auction, especially through TreasuryDirect, is that even small-lot purchases will get the auction’s high yield. The advantage of the secondary market is that you can see exactly the price and real yield you will be receiving. The negative is that you may face a small bid-ask spread. Most of the time, it doesn’t make a huge difference, but if you see a real yield you like, know that you can probably get it on the secondary market without dealing with the auction’s uncertainty.

As of Friday afternoon, this is how an auction purchase of $10,000 par of CUSIP 91282CJY8 would look (realize that conditions will change before Thursday’s auction):

• Par amount: $10,000.
• Inflation index on settlement date of May 31: 1.01586
• Principal purchased: $10,158.60.
• Price: 97.07
• Cost of investment: $9,860.95.
• + about $66.91 of accrued interest.

In this scenario, the investor would be paying $9,860.95 for $10,158.60 of principal and then will earn a coupon rate of 1.75% and principal accruals matching inflation for 9 years, 8 months.

Inflation breakeven rate

With a 10-year nominal Treasury note yielding 4.41% on Friday afternoon, this TIPS currently has an inflation breakeven rate of 2.32%, which is high by historical standards but seems about right in today’s elevated inflationary environment. A breakeven rate of 2.32% means that this TIPS would outperform the nominal Treasury if inflation averages more that 2.32% over 9 years, 8 months.

This chart shows the rather wild track of the 10-year inflation breakeven rate since January 2023:

Thoughts (from Portugal)

I am writing this Friday afternoon in Lamego, Portugal. It has been a beautiful day in the Douro Valley, with great food, wine and of course … port tastings. The people are friendly and the prices are at times amazingly cheap. I bought an excellent bottle of tawny port today at a vineyard for 8 Euros. “This price is ridiculous,” I said. The clerk said, “Everybody says that.”

Back to the TIPS …

I consider any real yield above 2.0% to be attractive, at least by standards of the last 15 years. Of course, real yields could climb higher, as they did in October 2023, or even dramatically higher if the Federal Reserve changes course toward higher rates. We can’t be sure, but collecting 2.0% above inflation is a positive thing, in my opinion.

I won’t be a buyer at Thursday’s auction. Why? Because I already purchased this TIPS at the originating auction (real yield of 1.810%) in January and then again on April 4 on the secondary market (real yield of 2.043%). So I have now completed the 2034 tier of my TIPS ladder.

Thursday’s result could get a better real yield than either of my purchases, so … as I said … this auction remains attractive.

The TIPS auction closes Thursday at 1 p.m. EDT. 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.

You can check the current real yield for this TIPS on Bloomberg’s U.S. Yields page.

I should be back in the United States by Thursday, and I will be posting the auction results soon after the close. Here is a history of auction results for this term over the last 9 years:

• 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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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.