Treasury Inflation-Protected Securities

• I Bond investors have entered 2017’s limbo period: Buy now, or wait until November?
• If you view I Bonds as a short-term investment, buying now seems to be the wisest decision.
• Investors longing for a higher fixed rate than zero will want to wait until November 1 to see the Treasury’s fixed-rate reset.

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• Buy-and-trade investors ought to be at least a little frightened; 30-year TIPS are very volatile investments.
• The real yield for this TIPS is currently trading very close to the 0.875% coupon rate. It should auction at close to par value, plus accrued inflation.
• The inflation breakeven rate is about 1.93%, which I consider ‘fair value’ versus a 30-year nominal Treasury.

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• Hurricane-boosted gasoline prices have caused a two-month surge in overall inflation.
• The Social Security cost-of-living adjustment will be 2.0% for 2018, lower than the Social Security Administration’s projection but higher than looked likely three months ago.
• The I Bond will get a new variable rate of 2.48% on November 1, an attractive number that was also boosted by the two-month surge in inflation.

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• The after-inflation yield of 0.450% was 20 basis points higher than where 10-year TIPS were trading on September 8.
• Today’s investors benefited from the Federal Reserve’s announced intention Wednesday to unwind its bond portfolio and continue gradually increasing short-term rates.
• The inflation breakeven rate of 1.82% is in the mid-range of recent results, but continues to indicate muted inflation expectations.

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• The current real yield of 0.34% would fall below results for the last five 9- to 10-year TIPS auctions.
• At that yield, investors would have to pay a slight premium to par value.
• The current inflation breakeven rate of 1.86% is solidly in the neutral range. This TIPS isn’t cheap versus a nominal Treasury.

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