By David Enna, Tipswatch.com
Today’s 10-year reopening of CUSIP 91282CJY8 — a 9-year, 8-month Treasury Inflation-Protected Security — generated a surprisingly high real yield to maturity of 2.184%, the highest for this term at auction since January 2009.
The auction apparently drew weak demand, with a sub-par bid-to-cover ratio of 2.33. The “when-issued” auction prediction, released just before the close at 1 p.m. EDT, was 2.16%. Investors were not snapping this one up, and that meant a higher real yield than expected.
This TIPS trades on the secondary market, and around 8 a.m. today it was trading with a real yield to maturity of 2.08%. That secondary-market yield climbed to 2.15% just before the auction’s close.
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.
For today’s investors, the weak demand meant that this TIPS will outperform official U.S. inflation by 2.184% over the next 9 years, 8 months. We haven’t seen an auctioned yield that high for this term since January 2009, when a 10-year originating auction got a real yield of 2.245%.
Here is the trend in market 10-year real yields over the last 15 years, showing the dramatic round-trip to yields surpassing 2.0%:
Pricing
CUSIP 91282CJY8 carries a coupon rate of 1.75% that was set by the January originating auction. Investors got an unadjusted price of 96.249477, which reflects the spread between the auctioned real yield and the coupon rate. In addition, this TIPS will carry an inflation index ratio of 1.01586 on the settlement date of May 31.
With this information, we can calculate the investment cost of purchasing $10,000 par of this TIPS at today’s auction:
- Par value of investment: $10,000
- Inflation index at settlement date: 1.01586
- Accrued principal on settlement date: $10,158.60
- Cost of investment: $10,158.60 x 0.96249477 = $9,777.60
- + accrued interest of $66.91
In summary, an investor purchasing $10,000 par at this auction paid $9,777.60 for $10,158.60 of principal and will receive accruals matching inflation for the next 9 years, 8 months, plus an annual coupon rate of 1.75% on accrued principal.
Inflation breakeven rate
With the nominal 10-year Treasury note trading at 4.48% at the auction’s close, this TIPS gets an inflation breakeven rate of 2.30%, a bit lower than expected earlier today. It is significant to note that while the TIPS yield rose about 3 basis points at the auction’s close, the 10-year Treasury note held steady at 4.48%.
The breakeven rate is an indicator of investor expectations of inflation, but should not be considered an accurate predictor of future inflation.
Here is the trend in the 10-year inflation breakeven rate over the last 15 years, showing that today’s rate remains in the higher range, but well below the highs of early 2022.
Thoughts
I didn’t get a lot of feedback on my preview article for this auction, so I suspect there wasn’t a lot of reader interest. But the result was quite good for investors. Keep in mind that just five months ago, this TIPS originated with a real yield to maturity of 1.810%, 37 basis points below today’s result. That’s a big move.
From today’s Reuters report:
The Treasury’s $16 billion auction of 10-year Treasury Inflation-Protected Securities (TIPS) was poorly-received, suggesting investors expect price pressures will decline in the coming years. The high yield was 2.184%, higher than the expected rate at the bid deadline, which meant that investors demanded a premium to take down the note.
The bid-to-cover ratio, a gauge of demand, was 2.33, slightly lower than the previous auction’s 2.35, and the 2.40 average.
Were you an investor? What was your reaction?
Treasury will be auctioning a new 10-year TIPS on July 18. It will be interesting to watch how conditions change in the next two months.
Today’s auction closes out the history of CUSIP 91282CJY8, a TIPS that gave investors a solid first option for filling the 2034 rung of their investment ladders.
• 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.
Treasury Inflation-Protected Securities 
Is there a post that helps compare a TIPS that you missed at auction to the same one on the secondary market? Trying to determine whether to buy this 10-year TIPS in Fidelity (e.g. 100k) with the aim of holding it to maturity and how the expected proceeds would compare if bought at reopening.
Conditions change hour by hour on the secondary market, so you have to take a look at current pricing. CUSIP 91282CJY8 is trading this morning with a real yield to maturity of 2.121% for a large-lot purchase. So the yield is down slightly from the auction’s 2.184%. Price is around 96.785 versus 96.249 at auction.
Is it still a good buy on the secondary market? FOMO
I don’t regret buying the 5 year TIPS but the fluctuations … how could 200 be up +$1700 in 4 weeks then <$300 now (per Fidelity)? Jumpy investors?
I bought & glad I did. Many thanks for the pre & post auction posts Mr. Enna!
The high yield was 2.184%, higher than the expected rate at the bid deadline, which meant that investors demanded a premium to take down the note.
Could you please explain how this works? Is it supply and demand? There was less demand for this offering ( presumably because investors are expecting lower inflation), so they have to bump up the yield to make it more attractive to buyers? Less inflation risk = higher yield?
Thanks, Josh
Lower inflation expectations makes nominal Treasurys more appealing versus TIPS, since inflation has to average 2.3% for the TIPS to out-perform. These auctions attract big-money investors and dealers, and they are on top of trends every second. There was a positive jobless claims report Thursday morning, which led to speculation that the Fed would hold interest rates higher for longer, which led to speculation that inflation would be held down by the higher rates.
I wouldn’t say less inflation risk = higher real yield, but in most cases it would be true. That’s the key of the inflation breakeven rate. When it rises, that means TIPS are more expensive and will need higher inflation to outperform. When it falls, TIPS are less expensive and need less inflation to outperform versus a similar nominal Treasury.
This auction makes me wonder if I should hold out for a better real yield. The demand for this reopening tips was weaker than expected. It give me a pause to think whether it is a good idea to compare this real yield to the yields of the past. In one sense, it does but makes me think whether I am looking in a rear view mirror.
For about a year, I was “nibbling” into TIPS when I saw yields I liked and eventually by late fall 2023 I was able to build out my target TIPS ladder. If I had waited until this week, I could have done better, because yields are quite high now. But that’s not a big deal to me. Yes, real yields could continue climbing higher. The 2.0% target real yield I often mention for TIPS is a historical standard of return, meaning “normal.” So, also acceptable. And, on the other hand, yields *could* begin falling if the U.S. economy hits the rocks.
I participated in my first Treasury auction today with this, bought $1,000 to see how it went. The YTM showed as 2.219% with the coupon at 1.75%. From above, I am not sure I am actually getting that 2.219%. I am still trying to figure out TIPS, I really want to love them.
The real yield to maturity is determined by the discounted price you received, basically getting $1,015.86 of principal for $977.76. Once that purchase is completed, you then get inflation accruals and 1.75% annual interest on the growing level of principal.
Here is a highly simplified way to look at this “real yield” issue: With your investment of $1,000 par you actually paid $977.76 (the discounted price) for $1,015.86 of principal. That is an immediate 3.9% gain. Divide 3.9% by 9.66 years and you get 0.40%. Add that to the coupon rate of 1.75% and you get 2.15%, a rough estimate that comes close to the 2.184% actual result.
This makes sense, thank you very much! On my purchase, Schwab showed my total cost after purchasing to be $984.30, not $977.76; not sure what that is about either.
On 5/15 I bought $100k of 5yr TIPS. The weird part was that the moment I purchased Schwab showed I had a loss.
Open Date Quantity Price Cost/Share Market Value Cost Basis Gain/Loss $ Gain/Loss % Holding Period
05/15/2024 100000 $99.92188 $1.01 $100,543.39 $101,204.50 -$661.11 -0.65% Short Term
I asked on Bogleheads and could not get a reasonable answer. I presume I will get the 2.046% YTM that was stated, but it was a bit offputting to buy and by the time I hit my summary page (1 second) it was showing a loss of $661.11. Since then, the basis has changed every day so it is a bit confusing as to what’s what. In the end, I am assuming I will get my 2.046%, but no sure how I earned a $661.11 loss simply by buying.
TIPS seem great, I just wish they were a little bit clearer…or clear enough Bogleheads could explain what is happening. I have a feeling TIPSwatch might be able to!
You may be showing an immediate loss because of the bid/ask spread. If you bought and resold promptly you would very likely take a loss. After a few futile attempts to calculate the real cost and value, I generally ignore the discrepancy and assume I am getting what I expected.
I also have my TIPS in Schwab IRA accounts. Unfortunately Schwab reports TIPS quotes and values as if they were regular bonds, without taking the inflation factor into account. So every TIPS I own is shown as having a value lower — sometimes MUCH lower — than it’s redemption value.
Because I plan to hold all TIPS to maturity, I only track the current redemption value at maturity, as indicated on Treasury Direct’s Historical Reference CPI Numbers and Daily Index Ratios page, which I try to go to every other month after the CPI release.
Adam, the reason Schwab shows a total cost of $984.30 is because that includes $6.69 of accrued interest (in theory earned from Jan 15 to May 31). You don’t get that interest because you didn’t yet own the TIPS. However, at the first coupon payment (July 15) that money will be returned to you along with another bit of interest. I don’t include accrued interest in my “cost of the investment” because it will be returned to you at the first coupon payment.
That TIPS you bought in May was a secondary-market purchase I can’t make out the purchase details. I never worry about a TIPS being up or down in my brokerage account. I am holding to maturity so I only care about par value x inflation index, which is what I will get at maturity.
If the TIPS you bought was the one issued in April 2024, then it currently has an inflation index of 1.008, or a principal value of $100,800.
This is awesome, thank you very much! I figured I was ok with my TIPS, i just did not quite understand. I guess I still do not, but I am getting better thanks to this site! I am pretty confident I want TIPS whether or not I fully understand them. I do plan on buying TIPS and holding to maturity, so I figure any of my worries/confusion is likely moot. Still, with 6 figure buys I have some nervousness about not fully understanding what I am doing.
Go check out your post on Boogleheads. You should find your answers there.
I wasn’t in the market for this issue, but am looking ahead to the 5 year next month. If it looks attractive, it will be a great add to my 2029 rung. Thanks for the reporting on this. Love your posts.
Thank you David for all of your helpful posts! I was a buyer in this auction, as I was in the previous 2 auctions for this CUSIP. I’ve been buying TIPS regularly for the past 2 years and I’m planning to buy at the 5-year reopening next month. I also have a big collection of Ibonds that I started buying 20 years ago so I’ve got lots of inflation protection! Thanks again for your help.
Your earlier post may not have generated much interest, but it sure helped me take the bait. That plus the fact that yields started rising again earlier in the week…
Because my IRA custodian offers only a very limited number of secondary market TIPs, I’ve had to build my ladder with auctions…looking forward to what the June 5 year brings.
Thank you for your analysis and teaching over the years. I found your site just before I retired in 2022. I have been investing in Ibonds, Tips and Treasuries to protect my taxable and retirement savings. Your writings have been an incredible help.
Thank you Mr. Enna for your always cleary stated posts; but, what does Reuters mean by “… investors expect price pressues will decline…” –that inflation will decline or that prices of TIPS will decline?
Treasury’s $16 billion auction of 10-year Treasury Inflation-Protected Securities (TIPS) was poorly-received, suggesting investors expect price pressures will decline in the coming years.
That is referring to the drop in the inflation breakeven rate, which indicates investors think inflation may weaken.
I was a buyer at this auction. Thank you very much for your thoughtful and informative posts!
JB
David, I did read your Preview article with great interest and decided to purchase this CUSIP today via Treasury Direct. This is the second TIPS I have purchased since discovering your website. Your insights are wonderful! Thanks so much!
Welcome back! This does look good. I did not buy, but might pick up later on the secondary market depending on how things go. I have a good amount of I bonds maturing in ‘34, though some may be redeemed earlier for tax reasons. I’m getting to the point where I’m reluctant to lock up too much more in bonds, though I bonds more than 5 years old are safe and liquid. But TIPS, at least for the moment, have a better return. Mainly, I am enjoying the 5% money market returns, while they last.
I got in this one because I decided earlier this year to get serious with building 10yr-20yr tips ladder (and stated reading this blog for that reason). Good call!
Welcome back Mr. Enna!! Thanks to your guidance and the Bloomberg site that you mentioned for the latest rate updates, I did make a last minute purchase. And boy am I glad I did! Initially I was not planning to buy since I have I-Bonds maturing in 2034 and also I did buy this particular TIPS in the initial and reissue offerings too. But then, I figured I could redeem the I-Bonds early or use these TIPS to pay for taxes etc. Thanks again for all your time and help.