By David Enna, Tipswatch.com

The U.S. Treasury on Thursday will offer $19 billion in a new 10-year Treasury Inflation-Protected Security, CUSIP 91282CLE9. The coupon rate and the real yield to maturity will be set by the auction’s results.

This will be an interesting auction because last week’s inflation report for June showed deflation of -0.1% for all-items prices, and that triggered the 10-year real yield to fall to 1.94% at Friday’s close, the lowest level since March 28. The 10-year real yield has fallen 34 basis points since hitting a 2024 high of 2.28% on April 30.

It’s impossible to say where real yields will be heading this week. The bond market has been volatile, but the apparent cooling of the U.S. economy, combined with weakening inflation and a more dovish Federal Reserve could send yields even lower.

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.

Facts about this auction:

• The auction size of $19 billion is the largest in the history of the Treasury’s 10-year TIPS offerings. It’s about 12% higher than a similar auction in July 2023. Could increasing auction sizes result in weaker investor demand? So far, that hasn’t been the case.
• This TIPS will carry an inflation index of 1.00086 on the settlement date of July 31. That amounts to just $8 on a $10,000 investment, so it is likely that this new TIPS will auction with an investment cost close to — or just below — par value of 100, even with the additional principal added in.
• At this point it would appear the auctioned real with to maturity will be somewhere around 1.94%, which was the Treasury’s yield estimate at Friday’s close. That would set the coupon rate at 1.875%. The Treasury updates its estimate at each market close on this page.

Here is the trend in the 10-year real yield over the last four years, showing that yields remain at attractive levels even after the recent decline:

Inflation breakeven rate

The Treasury estimates the nominal yield of a 10-year Treasury note closed Friday at 4.18%, which creates an inflation breakeven rate of 2.24% for a new 10-year TIPS, based on data from Friday. Things will change before the auction, but a breakeven rate of 2.24% would be the lowest for this term since July 2022.

The breakeven rate is important because it sizes up the TIPS versus a nominal Treasury. If you think inflation will average more than 2.24% over the next 10 years, you buy the TIPS. If not, you would favor the nominal Treasury.

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

Thoughts

It’s impossible to know where real yields are heading. The current trend seems to point to lower yields, but this is a volatile market. I believe a 10-year real yield around 1.94% remains attractive. Last year, the July 2023 auction of a new 10-year TIPS resulted in a real yield of 1.49%, well below the current market.

I won’t be a buyer because I have already filled the 2034 rung of my TIPS ladder with purchases of the January 10-year, CUSIP 91282CJY8. My initial purchase in January got a real yield of 1.810%, so 1.94% doesn’t look bad.

If you are thinking of investing in this TIPS, you can track the Treasury’s yield estimates here and see real-time yields for the January 2024 TIPS here. This TIPS auction closes Thursday at 1 p.m. 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.

I plan on posting the auction results sometime Thursday (but I am in Alpine Europe and I can’t be sure when that will happen.)

Here is the history of 9 – to 10- year TIPS auctions over the last four years:

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• 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

• TIPS investor: Don’t over-think the threat of deflation

• Upcoming schedule of TIPS auctions

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Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).

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.