By David Enna, Tipswatch.com

The Treasury’s offering of $24 billion in a new 5-year TIPS, CUSIP 91282CLV1, auctioned today with a real yield to maturity of 1.670%, the lowest for this term since April 2023.

This one is a bit hard to read because of the unusual nature of the October TIPS auction each year, which almost always gets a real yield below the apparent market rate. I talked about this in my preview article on this auction.

The Treasury’s estimate of the real yield of a full-term 5-year TIPS closed Wednesday at 1.82%, but yields have been sliding lower this morning. The most recent TIPS on the secondary market, maturing in April 2029, was trading at about 1.76%. But the new TIPS auctioned each October gets a lower real yield than the April TIPS because it won’t be exposed to weak non-seasonally adjusted inflation in its closing months to maturity.

The key number to look at is the “when issued” prediction for this auction, released just before the close. That number predicted a real yield of 1.641%, so today’s auction result came in higher than expected at 1.670%. The bid-to-cover ratio, a good indication of investor demand, was 2.40, below recent auctions of this term. All of that indicates investor demand wasn’t strong.

The October auction is always a bit of an outlier. Here is the trend in the 5-year real yield through 2024, showing the sharp decline beginning in May and then reversing in late September:

Pricing

This was a new TIPS, so the Treasury set its coupon rate at 1.625%, one notch below the real yield of 1.670%. It will carry an inflation index of 1.00042 on the settlement date of Oct. 31. All this means investors got it at a slight discount, an unadjusted price of 99.786263. Here is how a purchase of $10,000 par would be priced:

• Par value: $10,000.
• Principal on settlement date: $10,000 x 1.00042 = $10,004.20.
• Cost of investment: $10,004.20 x 0.99786263= $9,982.82.
• + accrued interest of $7.15.

In summary, an investor purchasing $10,000 par paid $9,982.82 and will receive principal of $10,004.20 on Oct. 31. The accrued interest will be returned at the first coupon payment.

Inflation breakeven rate

With the nominal 5-year Treasury note trading at 4.01% at the auction’s close, this TIPS gets an implied inflation breakeven rate of 2.34%. I say implied because of the unusual nature of the October auctions. Maybe a better estimate would be around 2.29%. If anyone can find a more-official number, let me know.

Here is the trend in the 5-year inflation breakeven rate through 2024, showing a recent surge in inflation expectations:

Thoughts

TIPS yields were trending slightly lower on Thursday morning, after three weeks of increases. Today’s auction result of a 1.670% real yield looks attractive, despite the appearance it was below the “market.” That’s just the way this October auction works. But it is below the results of October auctions in 2022 (1.732%) and 2023 (2.440%).

No media service covers TIPS auctions live anymore, but I found this snippet a day later from MarketWatch, via MSN, on Friday:

Treasury’s $24 billion auction of 5-year Treasury Inflation-Protected Securities was weak, with below-average bidding by non-dealers, according to BMO Capital Markets strategist Vail Hartman.

This TIPS will be reopened at auction on December 19. Here are results for recent auctions of this term, showing the transition from real yields deeply negative to inflation in 2021:

• 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).

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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.