May 22 update: Reopening option gets real yield of 2.220%
By David Enna, Tipswatch.com
The U.S. Treasury on Thursday will auction $18 billion of a reopened 10-year Treasury Inflation-Protected Security, CUSIP 91282CML2. The result will be a 9-year, 8-month TIPS with an already-set coupon rate of 2.125%.
At this point — Sunday a week before the auction — it looks like the real yield to maturity could be around 2.11% and the inflation breakeven rate at 2.32%. But a lot can change before the auction, which will close at 1 p.m. Thursday. These are volatile times in the U.S. bond market.
Definition: The “real yield to maturity” of a TIPS is its yield above official future U.S. inflation, over the term of the TIPS. So a real yield of 2.11% means an investment in this TIPS would provide an annual return that exceeds U.S. inflation by 2.11% for 9 years, 8 months.
CUSIP 91282CML2 had its originating auction on January 23, when it generated a real yield to maturity of 2.243%, the highest auction result for this term in 16 years. That auction set the coupon rate at 2.125%.
It then had its first reopening auction on March 20, with a real yield to maturity of 1.935%. Thursday’s auction will close the books on CUSIP 91282CML2, and the Treasury will auction a new 10-year TIPS on July 24.
So now — potentially — investors have a chance to grab a 10-year TIPS (either at auction or on the secondary market) with a real yield above 2%, a historically attractive milestone. Of course, real yields can continue rising; there is no guarantee. But a 2% yield above future inflation is a solid investment, if the TIPS is held to maturity.
Here is the trend in the 10-year real yield over the last 15 years, showing that yields remain near 15-year highs:
Pricing
Friday’s closing real yield of 2.11% is just slightly below the coupon rate of 2.125%, so CUSIP 91282CML2 is currently trading at a slightly premium price of 100.13. In addition it will have an inflation index of 1.01320 on the settlement date of May 30. So if the real yield holds at 2.11% at the auction (it won’t be exactly that, but this is an example) here is the investment cost of a $10,000 par value purchase:
- Par value: $10,000.
- Inflation-adjusted principal: $10,132.
- Cost of investment: $10,132 x 1.00132 = $10,145.37
- + accrued interest of about $80.
In summary, under this scenario an investor would pay $10,145.37 for $10,132 of principal. From that point on, the investment would grow with accruals on principal matching U.S. inflation, plus receive annual coupon interest of 2.125%.
Inflation breakeven rate
The 10-year nominal Treasury note closed Friday with a yield of 4.43%, giving this TIPS an inflation breakeven rate of 2.32%, a historically high number but in the range of recent auctions. Inflation over the last 10 years, ending in April, averaged 3.1%.
If you think inflation is going to average higher than 2.32% over the next 9 years, 8 months, buy the TIPS. If not, invest in the nominal Treasury. Here is the trend in the 10-year inflation breakeven rate over the last 15 years, showing the breakeven hovering in the 2% to 2.5% range over the last three years:
Thoughts
If you are interested in CUSIP 91282CML2, you can swoop in at any time and buy it on the secondary market, if you see a real yield you like. The advantage there is you will know the exact real yield you are receiving. The advantage of buying at auction, especially through TreasuryDirect, is that even small-lot purchases will get the auction’s high yield.
Either way, if the real yield holds around 2.11%, this will be an attractive auction. I won’t be a buyer, since I purchased my 2035 allotment at the January auction, when the real yield was slightly higher. Reminder: There is no way to know where real yields are heading. Higher U.S. deficits certainly could result in higher yields for longer-term Treasurys.
You can track the real yield of this TIPS in real time on Bloomberg’s Yields Curve page. It is the 10-year TIPS listed there.
This TIPS auction closes Thursday at 1 p.m. EST. 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 will be posting the auction results soon after the close, but my timing is uncertain since I am traveling this week in Scandanavia, with a six-hour time difference. Here is a history of auction results for this term over the last 5 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
• TIPS investor: Don’t over-think the threat of deflation
• Upcoming schedule of TIPS auctions
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Follow Tipswatch on X 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.
Treasury Inflation-Protected Securities 
Now looking at current, secondary-market pricing on Thursday’s reopening TIP auction. Fidelity is adding about $60 in accrued interest. Will this happen if I participate in the auction? I’m thinking no, but have little confidence in the thought.
Yes, you will be purchasing accrued interest, but that will come back to you at the first coupon payment in July.
I think your question is answered here:
The FAQ is about price at auction and the answer includes this:
The key components are the high yield, coupon rate, adjusted price, inflation index at the settlement date, plus accrued interest.
I believe this $60 accrued interest is because you are looking at purchasing on the secondary market for a treasury originally issued in January. While there will be some accrued interest if purchased tomorrow at re-opening auction, the amount will be much, much less proportionally to the purchase amount.
I think this is correct, but will wait for other responses.
No, I got that wrong. Still will have accrued interest for the first 4 months of the coupon period.
I have successfully bid for this auction in my Fidelity IRA. Merrill did not know how to find this TIPS. Interactive Brokers is just plain weird, but might have it. Did not try on Schwab, but they have been good in the past in the bond-buying UI.
Thanks. Must be some WordPress caching oddity that used TipswatchChat’s icon for a Tipswatch post at 11:10am today.
The Fidelity bond purchase portal will not allow me to buy foreign inflation protected securities. I did find an ETF that offers those securities: WIP. There are other inflation-protected ETFs that are also buying non-government securities.
My TIPS bond ladder is elegant and I had never considered a TIPS ETFs. Bond fund valuations follow the vagaries of the interest rates in the bond market. I may buy the ETF anyway. Buy into it incrementally to avoid the price swings. WIP has 0.5% expenses.
Moody’s downgraded the U.S. sovereign credit rating on Friday. Diversify!
Thanks so much for this update! I so appreciate your keeping us apprised of these auctions.
If the real yield rises and remains solidly above the 2.125% coupon rate at auction, does that mean the TIPS would auction at a discount? Or will it likely still auction at a premium due to the inflation index and this being a reopening auction? (I’ve never quite wrapped my head around this.)
I prefer buying TIPS through TreasuryDirect at a discount to avoid the extra step of deducting amortized bond premiums when filing my taxes. One less thing to look for on TreasuryDirect’s poorly formatted 1099s.
If the real yield rises above 2.125%, then the unadjusted price (not counting the inflation accrual) will be discounted. But when you add in the accrual, the adjusted price could rise above 100, but you are immediately getting that additional principal, at a slight discount.
Thanks for the explanation. A small premium is not a dealbreaker to lock in a real yield above 2% for 10 years. Will wait and see how the market moves this week…
Bond premium amortization comes into play if ytm is less than the coupon, correct?
@DB – That’s what I thought. But if you buy TIPS at a premium through TreasuryDirect, TD will list the amortized bond premium in Box 12 of Form 1099 each year, which you have to manually deduct from interest earned on that TIPS when you file your tax return.
This happened with the 5-year TIPS I bought at the reopening auction in December 2022. The coupon rate was 1.625% but the high yield was 1.504%, so a bond premium amount associated with that CUSIP is listed on Form 1099 each year. My other TIPS holdings in TreasuryDirect were purchased at a discount, so the only relevant information for tax filing is interest payments and the original issue discount.
Justin, thanks for the information. Guess the best approach is to check if the unadjusted price is < $100 rather than comparing YTM to coupon, if one wants to avoid complications of bond premium amortization in a taxable account.
Does Turbotax import all of this data correctly?
If your account is at TreasuryDirect, no. That is a manual process.
Apologies, I should know by now how to hunt for an oft-asked question:
https://tipswatch.com/2023/01/24/treasurydirect-1099s-how-to-find-your-tax-forms-decipher-them/
Next auction of a completely new 10-year TIPS will be July 17, not June.
meant to say, announced July 17, actual auction date July 24.
July 24 is correct. Fixed this a few minutes ago. Thanks for the alert.
Good info thanks. Is this account (and TipswatchChat?) affiliated with this website?
Tipswatch is the author and TipswatchChat is a regular reader and commenter.
Dave,
From what I can tell, June 17 is when the 5-Y TIPS is reopening, and July 24 is when a new 10-Y TIPS is originating.
Also, under your Heading entitled “Inflation breakeven rate,” you discuss the 5-Y nominal rate, not the 10-Y. Additionally, according to the Treasury, the 10-Y closing nominal rate on Friday was 4.43%, not 4.48%.
Ajdo (‘Goodbye’ in Swedish, pronounced ‘Hey dough.’)
Brian S.
Obviously, this was a jet-lagged post. I hate writing these on a laptop without access to two screens (my home setup). I appreciate your careful reading.
Your chart of purported 10-year real yields appears to show 30-year real yields.
This is fixed. Thank you. The chart was correct but the heading was a dumb error.