Treasury Inflation-Protected Securities

• TIPS have held up relatively well because of a rise in the inflation-breakeven rate.
• We haven’t entered uncharted waters — today’s TIPS yields are in line with recent numbers.
• Bear market for TIPS? Not yet, and doesn’t seem likely.

I’m predicting that TIPS will be an attractive investment heading into 2017.

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• The real yield was about 37 basis points higher than the early October trend.
• The inflation-breakeven rate of 1.90% was the highest since May 2015.
• TIPS are drawing attention as fears of future inflation rise.

Today’s reopening auction of CUSIP 912828S50 – creating a 9-year, 8-month Treasury Inflation-Protected Security – resulted in a real yield of 0.369%. Here’s is the Treasury’s auction summary.

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• 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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