Treasury Inflation-Protected Securities

• Headline inflation, which was higher than expected in November, has now topped 2.0% for the first time since November 2018.
• Core inflation matched expectations but remained moderately high at 2.3% year-over-year.
• Non-seasonally adjusted inflation declined 0.05%, meaning principal balances for all TIPS will decline slightly in January.

As is often the case, a main factor in November’s all-items increase was a 1.1% increase in the price of gasoline, which is still down slightly (1.2%) year over year. But other prices also showed marked increases.

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• 10-year real yields (meaning yields above inflation) briefly dipped into negative numbers in August, but have climbed 30 basis points since then.
• The Treasury is offering a 10-year TIPS reopening auction on Thursday, but the real yield still isn’t attractive.
• The 10-year inflation breakeven rate is running at about 1.63%, below average annual inflation over the last 10 years. That will make this TIPS attractive to big money investors.

The U.S. Treasury on Thursday will auction $12 billion in a reopening of CUSIP 9128287D6, creating a 9-year, 8-month Treasury Inflation-Protected Security.

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• The October inflation report was a mixed bag, with core inflation coming in slightly lower than expected.
• Increases in energy prices accounted for more than half the overall increase in inflation.
• Food prices also are rising. Have you noticed?

The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4% in October on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, “headline” inflation increased 1.8%.

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• The I Bond’s fixed rate is falling from 0.5% to 0.2% for purchases through April 2020, a move that was expected after a year of declining interest rates.
• Bad news? Disappointing, yes, but I Bonds will remain an attractive investment into 2020 as long as real yields on TIPS remain depressed.
• Also, no change for the terms of EE Bonds. They’ll earn a lousy fixed rate of 0.1% but double in value in 20 years, for an effective return of 3.5%.

In response to deep declines this year in real interest rates, the U.S. Treasury announced today it is cutting the fixed rate for U.S. Series I Savings Bonds issued through April 2020 from 0.50% to 0.20%.

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