Treasury Inflation-Protected Securities

This Week’s 5-Year TIPS Auction Is A ‘Screaming Buy’

The real yield could be about 1.12%, the highest after-inflation yield in nearly 10 years of 4- to 5-year TIPS auctions.
The real yield curve has inverted, with the 5-year TIPS now yielding about 6 basis points more than a 10-year TIPS.
The inflation breakeven rate is currently a very reasonable 1.60%, making this TIPS desirable versus a nominal 5-year Treasury, and still competitive with best-in-nation bank CDs offering 3.5%.

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Summary

Headline inflation came in at 0.0% in November and was up 2.2% year-over-year. Core inflation was up 0.2% for the month and 2.2% for the year.
Non-seasonally adjusted inflation actually fell 0.33% in November, which means investors in TIPS will take a hit in January, as principal balances decline.
Overall inflation remains moderate. We have not entered a deflationary period.

Also, I’ve updated my Inflation and I Bonds page with the November numbers.

And here are the new January Inflation Indexes for all TIPS.

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The last time a 9- to 10-year TIPS auctioned with a real yield above 1.00% was on January 20, 2011, at 1.17%.
Buyers got this TIPS at a substantial discount because the real yield was well above the coupon rate of 0.750%.
The inflation breakeven rate came in at 1.99%, lower than in recent auctions. Another good sign for investors.

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TIPS funds have taken a hit in 2018, but that damage has been partially offset by distributions caused by rising inflation.
The total return of shorter-term TIPS funds remains positive for the year, thanks to a shorter duration and higher inflation.
A lot of the risk in TIPS funds has been wrung out, especially for shorter-term funds. Risk remains, but at an acceptable level?

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The real (after-inflation) yield looks likely to top 1.00% for the first time for any 9- to 10-year TIPS auction since January 2011.
The inflation breakeven rate is currently a reasonable 2.02% and should attract strong demand at this auction.
Buy it or not? Well, do you think interest rates will continue to rise, or have peaked? A tempting 5-year reopening is coming in December.