Treasury Inflation-Protected Securities

• Over the last year, real yields on shorter-term TIPS have dropped more than 100 basis points.
• In contrast, the real yield on a U.S. Series I Savings Bond has dropped just 30 basis points, making it the preferable investment.
• Coming Thursday: The U.S. Treasury will reopen at five-year TIPS at auction. I advise you to avoid it.

The U.S. Treasury will be offering $15 billion in a reopened five-year Treasury Inflation-Protected Investment on Thursday. Over the last several years, this December TIPS auction has been one of the most attractive each year. Not this year, though.

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• 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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