Treasury Inflation-Protected Securities

The U.S. inflation report for March had non-seasonally adjusted inflation rising 0.43%, enough to overwrite 5 months of deflation for the September 2015 to March 2016 adjustment period. Inflation ended up rising 0.08% in that six-month period, meaning  the Treasury will reset the I Bond’s variable rate to 0.16% on May 1.

That’s down from the current 1.54%, but it is good news for I Bond holders because a negative variable rate wipes out the fixed rate up to that amount. I’ve posted the new numbers on my ‘Tracking Inflation and I Bonds‘ page.

I’ve also posted a more in-depth analysis at SeekingAlpha.com.

Read my analysis at SeekingAlpha.com.

I wrote this as a SeekingAlpha.com exclusive … Why? It’s not a mystery. They pay me.

Here’s a summary:

• In 2016, TIPS yields have fallen much more sharply than the overall Treasury market.
• The five-year TIPS yield has fallen into a negative number, again.
• While TIPS remain inexpensive versus Treasurys, the yields today aren’t appealing.

Why is this happening? Jump over to SeekingAlpha.com to read my analysis:

Inflation Protection Is Getting More Expensive – Is It Worth It?

By the way, I’ll be posting tomorrow – also at SeekingAlpha – on the March inflation report, which will be very important for I Bond holders and potential buyers. It could result in a negative variable rate for I Bonds, reducing the composite interest to 0.0% for most I Bonds issued since 2008.

And I will updating my Tracking Inflation and I Bonds page on this site.

I will also advance next Thursday’s auction of a new 5-year TIPS.

Busy day!

A 10-year TIPS reopened today at auction with a yield to maturity of 0.315%, 41 basis points below the yield of this TIPS at the creation auction – just two months ago on Jan. 21.

This is CUSIP 912828N71, a 9-year, 10-month TIPS with a coupon rate of 0.625%, which was set at the January auction. That means today’s buyers had to pay a premium, an adjusted price of $102.67 for $100 of par value. However, that price adds in a slight discount, because this TIPS will have an inflation index of 0.99702 on the March 31 closing.

This was the lowest yield for any 9- to 10-year TIPS auction since March 2015, when a similar 9-year, 10-month TIPS went off with a yield of 0.2%. There have been six auctions of this type since last March.

But the yield was higher than looked likely at mid-morning, when the TIP ETF (one-day chart is show at the right) was rising sharply. At that time, this TIPS was trading on the secondary market with a yield of 0.29% and a cost of about $103.18. But TIPS began losing steam as the day continued, resulting in the slightly higher yield.

Inflation breakeven rate. With a nominal 10-year Treasury currently trading with a yield of 1.90%, this TIPS gets an inflation breakeven rate of 1.58%, which is low but up substantially from the ultra-low 1.30% of the original auction on Jan. 21. This indicates TIPS are gaining favor with investors, at least against nominal Treasurys.

I could say it’s been a weird week for Treasury Inflation-Protected Securities, but honestly, every week is a weird week for TIPS. The Treasury today will reopen CUSIP 912828N71, a 10-year Treasury Inflation-Protected Security that first auctioned on Jan. 21 with a coupon rate of 0.625%.

In the advance I wrote last week for this auction, this TIPS was trading on the secondary market with a real yield (after inflation) of about 0.36%. But then the market for TIPS weakened, and the yield rose to 0.47% on Tuesday. This TIPS was getting interesting.

But then came Wednesday’s inflation report and Federal Reserve unease about rate hikes, and bam … back down to 0.36%, right were we started. (The chart at the right shows yield estimates for a full-term 10-year TIPS, probably slightly higher than this 9-year, 10-month reopening.)

And the downward trend in yield is continuing today. I’d say alarm bells are ringing against an investment in this auction. Here’s were we stand:

• Bloomberg’s Current Yields page shows this TIPS is trading today on the secondary market with a real yield of 0.29% and a cost of $103.18 for $100 of par value. Buyers will pay a premium because the yield is well below the coupon rate of 0.625%.
• Yesterday’s Closing Price on this TIPS was about $102.78 with a yield to maturity of 0.337%.
• The TIP ETF is trading sharply higher this morning at $113.41, an increase of nearly 0.5%. That means TIPS yields are declining.

Where will today’s auction yield fall? Hard to say, but it isn’t going to be pretty. It could be somewhere in the 0.25% to 0.29% range, meaning investors will be paying about 3% above par for that 0.625% coupon rate.

Although I was a buyer of this issue back in January, I will pass on this auction. This TIPS will be reopened again in May and the Treasury will issue a new 10-year TIPS in July.

NOTE: I will be tied up this afternoon at the 1 p.m. auction close and I won’t be able to post immediately after the auction. Sorry! I will post results as soon as I can.

TreasuryDirect should be posting results here soon after 1 p.m.

The official inflation report from the Bureau of Labor Statistics says that inflation fell 0.2% in February, but that decline was determined by a whopping 13% drop in gasoline prices, which began rising in March. Every other price category showed an increase, and core inflation is up 2.3% over the last 12 months. That’s not deflation; it’s moderate inflation.

I posted an analysis at SeekingAlpha.com, including an update on the inflation-based variable rate on US Savings I Bonds. Hope you’ll click through and read it:

February’s Inflation Report: ‘Headline’ Deflation Hides Creeping Inflation; What It Means For I Bonds

I also updated  my ‘Tracking Inflation and I Bonds‘ page with the new numbers.