Treasury Inflation-Protected Securities

Hmmm… a TIPS auction on a Wednesday? I have to admit, I didn’t see that coming. I have been covering TIPS auctions for 5 1/2 years, and every single one was on a Thursday, unless the Thursday was a federal holiday.

I searched for a reason for the one-day leap forward, but couldn’t find one. Maybe the Treasury wanted to step aside during Great Britain’s Brexit vote. Maybe the Treasury has summer vacation plans. I saw today that Republicans in the US House voted to start their July 4th holiday today. Ah, the life …

At any rate, the Treasury’s auction Wednesday of a reopening of CUSIP 912810RR1 – creating a 29-year, 8-month TIPS – resulted in a real yield to maturity of 0.905%. (Real yield is the yield above inflation.)

I posted an analysis at SeekingAlpha.com, please read it there.

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I’ll be working tomorrow morning – I’m usually off on Thursdays – so I won’t be able to post a morning outlook. I wrote an analysis of this auction last week on SeekingAlpha.com, so check that out for a lot more information, including a historical chart of TIPS auctions of this term.

The Treasury is reopening CUSIP 912828N71 at auction Thursday, creating a 9-year, 8-month Treasury Inflation-Protected Security. This TIPS originally auctioned on January 21 with a coupon rate of 0.625% and a real yield (after inflation) to maturity of 0.725%.

I was a buyer at that original auction, but a lot has changed in the last four months. Here is where CUSIP 912828N71 – which trades on the secondary market – stands on Wednesday evening:

• Bloomberg’s Current Yields page is showing this TIPS trading with a real yield of 0.22% and a price of about $103.82 for $100 of par value. That’s about 8 basis points higher than a week ago.
• Wall Street Journal’s Closing Prices page shows this TIPS closed the day with a real yield of 0.236% and a price of about $103.71.
• The Treasury’s Real Yields Curve page estimates that a full-term 10-year TIPS would have a real yield of 0.26%. That’s in line with the other prices, since a slightly longer term should have a slightly higher yield.

That Treasury page also shows TIPS yields took a ‘big’ jump up today – about 9 basis points. The TIP ETF dropped about 0.86% on the day – its price declines when yields rise – and that happened almost entirely after 2 p.m., when the Federal Reserve released the minutes of its Open Market Committee. Those minutes lead to this Wall Street Journal headline:

Fed to Markets: June Rate Increase Is on the Table

The Fed often releases its minutes on the day before a TIPS auction. Many times in the last five years, those minutes have disrupted the TIPS auction enough to cause much lower yields. It appears this time the Fed could cause TIPS yields to rise, and that will be a good thing for investors in Thursday’s auction.

You can read the Fed minutes here. (It’s an unusually lengthy document.) I think this is a paragraph that jolted the market:

Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.

Will the Fed raise short-term interest rates in June? I doubt it. But it just laid the groundwork for future increases in 2016.

I will be posting the result of Thursday’s auction on SeekingAlpha.com.