By David Enna, Tipswatch.com

The Treasury on Thursday will offer $9 billion in a new 30-year Treasury Inflation-Protected Security, CUSIP 912810US5. The real yield to maturity and coupon rate will be determined by the auction results, but it looks likely this TIPS will get an attractive real yield, possibly close to 2.5%.

The 30-year real yield has been sinking a bit through the month of February, down about 17 basis points since February 2. But the current Treasury estimate of 2.46% remains historically attractive. In the last 16 years, only one TIPS auction of this term — last year’s August reopening — has generated a real yield that high.

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 2.46% means an investment in this TIPS would provide a return that exceeds U.S. inflation by 2.46% for 30 years.

Here is the trend in the 30-year real yield over the last 16 years, showing the massive move higher since the Federal Reserve ended quantitative easing in 2022 and began raising short-term interest rates. During that time, federal deficits have also increased substantially.

A ‘peculiar’ investment

Investors need to realize that any 30-year bond — even a Treasury issue — is going to be highly volatile, rising and falling with changes in market interest rates. My advice has always been to buy TIPS with the intention to hold to maturity. That’s even more important with a 30-year TIPS, which will see values swing mightily while also having somewhat limited appeal on the secondary market.

For example, a 30-year TIPS issued in February 2022 got an auctioned real yield of just 0.195%. Today, four years later, that TIPS is trading with a market price of about 55.05, meaning the investor has now lost nearly 45% of the original purchase price. I wouldn’t have recommended buying that Feb 2022 TIPS, but today’s version with a real yield of 2.46% looks a lot more attractive.

Of course, real yields could continue rising higher. That’s the risk. But an investor committed to holding to maturity will have principal growing with inflation for 30 years, plus a coupon rate of maybe 2.375% paid out each year on rising principal.

Pricing

This is a new TIPS, so an investor will pay less than par value on the auction’s settlement date of Feb. 27. The inflation index on that date will be 0.99991, meaning the investment price will be slightly discounted. In addition, the coupon rate will be set to the 1/8th percentage point below the auctioned real yield.

So … in conclusion … the cost of this TIPS will be a bit below par value.

Inflation breakeven rate

The 30-year Treasury bond closed Friday with an estimated nominal yield of 4.69%. If this new TIPS gets a real yield of 2.46%, the 30-year inflation breakeven rate would be 2.23%, which means the TIPS will outperform the bond if inflation averages more than 2.23% over the next 30 years.

That’s a fairly high breakeven rate, but consistent with recent trends. Inflation over the last 30 years, ending in January, has averaged 2.5%.

Here is the trend in the 30-year inflation breakeven rate over the last 16 years, showing the remarkably stable inflation expectations since 2021:

Thoughts

I think this TIPS is most appropriate for an investor with an expectation to live through the maturity date of Feb. 15, 2056. It would be an excellent addition, in my opinion, to a 30-year ladder of TIPS investments — for the person who can confidently hold to maturity.

Opinion: I like the idea of having principal growing with inflation, while also collecting a coupon rate of nearly 2.5% along the way. I recommend using a tax-deferred account because of the long years to the eventual payout of principal.

But I won’t be a buyer. My TIPS ladder, primarily in a tax-deffered account, extends to 2043 when I will be 90 years old. I might live longer, but probably not.

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.

Because I am currently traveling in Australia — 14 1/2 hours ahead of EST at the moment — I can’t say when I will be able to post results of the auction , which will close around 3:30 a.m. Friday in central Australia. I am going to be late with the news, but you can find results on this page after the close.

Here are auction results for the 29- to 30-year term over the last seven years.

• 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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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.