Treasury Inflation-Protected Securities

• The coupon rate was set at 0.875%, so buyers got it at a discounted price of about $98.76 for $100 of value.
• The inflation breakeven rate came in at 2.13%, higher than recent auctions.
• Market reaction to the auction looks mild, but did the yield come in higher than expected?

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• Year-over-year inflation rose 2.5%, the highest number in nearly five years.
• Gasoline prices rose sharply in January, but core inflation still rose 0.3% without gasoline. The Federal Reserve will take note.
• The report is welcome news for holders of I Bonds and TIPS, reversing a flat inflation index over the last three months.

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Also, I have updated by ‘Tracking Inflation and I Bonds‘ page with these new numbers.

And here are the new March inflation indexes for all Treasury Inflation-Protected Securities.

• A real yield around 0.91% won’t be enough justify an investment in a highly-volatile issue, even for most buy-and-traders.
• If you’re older than 60, the 30-year term isn’t appealing as a buy-and-hold investment.
• This TIPS is likely to be cash-flow negative in a taxable account.

The U.S. Treasury announced Thursday that it will auction $7 billion in a new 30-year Treasury Inflation Protected Security (CUSIP 912810RW0) on Thursday, February 16. I haven’t been a fan of the 30-year TIPS maturity for several years, especially when after-inflation yields are well below the 2% benchmark typical in such a long-term investment.

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• Short-term TIPS have real yields negative to inflation.
• An I Bond with a fixed rate of 0.0% will match inflation and provide a better return than a short-term TIPS.
• For a short-term TIPS fund to outperform, real yields will have to fall deeper into the negative range, which seems unlikely.

I suggesting that you take a look at an alternative to short-term TIPS funds: U.S. Series I Savings Bonds.

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• FRNs are getting more intriguing as interest rates rise from near-zero levels.
• They offer protection against rising interest rates, but not rising inflation. That makes FRNs a good complement to TIPS and I Bonds.
• But are they a good idea for a small investor? Will you do better with a 2-year bank CD?

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