Treasury Inflation-Protected Securities

• While 0.4% looks high, core inflation remained in the moderate zone, just above 2.0% over the last 12 months.
• Energy costs, along with shelter costs, accounted for most of the October increase.
• There is nothing in today’s report that should cause the Federal Reserve to delay an interest rate increase in December.

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Also, I have updated my Inflation and I Bonds page with these new numbers.

And here are the new TIPS inflation indexes for December.

• The after-inflation yields on TIPS have been rising sharply over the last month.
• But TIPS are out-performing the overall bond market, with yields rising at a slower pace.
• A rise in the 10-year inflation-breakeven rate indicates that investors are pricing in higher inflation, and also that TIPS are getting more expensive versus nominal Treasurys.

The after-inflation yield on a 10-year TIPS is rising again today and is up more than 30 basis points since October 1. Will that be enough to make Thursday’s 10-year TIPS reopening attractive?

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• With the 10-year TIPS yielding just 0.11%, the Treasury couldn’t justify continuing the 0.10% fixed rate.
• But the I Bond will get a six-month variable rate of 2.76%, making it an attractive 1-year investment, no matter what happens in the second six months.
• EE Bonds remain a very attractive super-safe investment for anyone would can hold them for 20 years.

Disappointing? Yes. But all I Bonds – no matter when they were purchased – will earn a variable rate of 2.76% for six months.

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• Buy now? You guarantee a one-year return of 1.56%, which is attractive.
• Wait until November 1? You could lose the 0.1% fixed rate, but earn more money in one year anyway.
• Either way, this isn’t going to be a bad investment.

Yes, a 0.10% fixed rate may not seem like a big deal, but realize this: A 10-year TIPS is currently yielding 0.11%. I Bonds with a fixed rate of 0.1% and an attractive variable rate are going to be a hot investment through May 2017. But what if the fixed rate falls to 0.0%?

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• Buyers had a pay a big premium for the 1.00% coupon rate, about $110.67 for $101.65 of value, when accrued inflation is added in.
• The inflation breakeven rate came in at about 1.83%, 31 basis points higher than at the originating auction in February.
• The trend in breakeven rates indicates rising expectations for inflation.

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