By David Enna, Tipswatch.com

The U.S. Treasury on Thursday will offer $19 billion in a reopened 10-year Treasury Inflation-Protected Security, CUSIP 91282CRE3. I’d expect demand to be strong, despite recent Treasury-market volatility. This TIPS looks attractive.

CUSIP 91282CRE3 had its originating auction on July 23, when it got a real yield to maturity of 2.438%, the highest at auction for this term since October 2008. The auction set its coupon rate at 2.375%.

This week’s auction looks likely to go even higher. CUSIP 91282CRE3 trades on the secondary market, and closed Friday with a real yield of 2.59%. If that yield holds through the auction, we are entering rare air. In the last 20 years, there have been 114 auctions of this term. These are the only ones with real yields exceeding 2.0%:

Note the time span in this chart, which includes only auctions before 2010 or after 2023. TIPS investors suffered through a 13-year period with much lower real yields, even as low as -1.145% as recently as five years ago. Of course, 10-year real yields could continue climbing higher, but getting anywhere near 2.5% is an investing opportunity, especially held to maturity.

Definition: The “real yield to maturity” of a TIPS is its yield above future U.S. inflation, over the term of the TIPS. So a real yield of 2.59% means an investment in this TIPS would provide a return that exceeds official U.S. inflation by 2.59% for 9 years, 10 months.

Here is the trend in the 10-year real yield over the last 20 years, showing that today’s 10-year real yield has now surpassed the recent highs set in fall 2023:

Pricing

CUSIP 91282CRE3 is going to auction at below par value. That is pretty much guaranteed because the current real yield of 2.59% is well above the coupon rate of 2.375%, plus the inflation index on the settlement date of September 30 will be 0.99985. It is slightly less than par because of very slightly negative (-0.01%) non-seasonally-adjusted inflation in July 2026.

CUSIP 91282CRE3 closed Friday with a price of 98.13. Let’s estimate the cost for a par value investment of $10,000 at this auction, assuming the real yield holds at 2.59% (it won’t, but this is an estimate):

• Par value: $10,000.
• Adjusted principal on settlement date: $10,000 x 0.99985 = $9,998.50.
• Cost of investment: $9,998.50 x 0.9813 = $9,811.53.
• + accrued interest of about $49.70.

Again, this is an estimate and market conditions will change by Thursday. In this example, the investor pays $9,811.53 for $9,998.50 in principal on the settlement date. From then on, the investor earns inflation accruals matching official inflation, plus an annual coupon of 2.375% paid on adjusted principal. The accrued interest will be returned at the first coupon payment in January.

Inflation breakeven rate

The 10-year Treasury note closed Friday with a nominal yield of 4.97%, which gives this TIPS a current inflation breakeven rate of 2.38%, in the range of recent auctions for this term. That number seems reasonable. Inflation over the last 10 years, ending in August, has averaged 3.4%.

We have to wonder, though, when that 10-year note’s nominal yield starts to look too tempting to ignore. At 5%, we are getting pretty close. But I would still prefer the TIPS for the added benefit of inflation protection.

Here is the trend in the 10-year inflation breakeven rate over the last 20 years:

Since late 2022, we have seen a remarkably stable pattern of 10-year inflation expectations, ranging from about 2.2% to 2.5%. As I always point out, inflation breakevens are just a measure of sentiment and are a lousy predictor of future inflation.

Thoughts

This will be an attractive auction. Keep in mind, though, that CUSIP 91282CRE3 trades on the secondary market and can be purchased at any time you see a real yield you like. The advantage of buying at auction is that even small-lot purchases will get the auction’s high yield. The advantage of the secondary market is that you can see exactly the price and real yield you will be receiving. The negative is that you may face a small bid-ask spread.

At this point, I am not bothering to recommend buying at TreasuryDirect, at least until we get through this ID.me verification mess. Remember that savings bonds are the only securities you can redeem at TreasuryDirect. Everything else needs to be transferred out to be sold, which can take months.

Thursday’s auction is likely to generate a real yield around 2.5%, which we haven’t seen at auction for this term since October 2008, in the heart of a major financial crisis. Real yields could continue rising, of course, but this is an attractive milestone for a hold-to-maturity investor.

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 will be posting the auction results soon after the close on Thursday. 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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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.