Treasury Inflation-Protected Securities

Sorry for the delay — it’s been quite the day. Meeting after meeting, all afternoon. And so, what happened at the 1 p.m. close of today’s TIPS auction?

CUSIP 912810RL4 auctioned with a real yield (after inflation) to maturity of 1.20%. This is a 29-year, 4-month Treasury Inflation-Protected Security with a coupon rate of 0.75%. In addition to that coupon, the TIPS’ principal balance will grow at the rate of inflation.

Because the auctioned yield was much higher than the coupon rate, this TIPS was sold at an unadjusted price of $88.91 for $100 of value. The adjusted price – what buyers actually paid – was higher because this TIPS has will have an inflation index of 1.01213 on the Oct. 30 closing date. That means buyers will actually pay about $89.99 for $101.21 of inflation-adjusted value.

The yield ended up being slightly higher than the result of the last reopening of this TIPS, on June 18. That auction resulted in a yield to maturity of 1.142%.

Inflation breakeven rate. A 30-year nominal Treasury is currently trading with a yield of 2.86%, meaning this TIPS has an inflation breakeven rate of 1.66%. That is awesomely low and puts this TIPS in the ‘ultra-cheap’ range. If inflation averages higher than 1.66% over the next 29 years, this TIPS will outperform a nominal Treasury.

Take a look at this chart showing CPI-U since 1961, and you’ll see that the lowest 30-year average is 2.7%, for the 30 years than ended in June 2015. Here is the trend over the last five years for the 30-year breakeven. Note that at times (during quantitative easing, which raised inflation fears) it was approaching 2.8%. Now inflation fears are sidelined, making this TIPS a strong investment for those who can take the long maturity and high volatility.

I’ll be working tomorrow morning – I usually have Thursdays off – so I won’t be able to post an update then. After the auction closes, I’ll post the result, but I won’t be able to post much commentary.

We’re looking at the reopening of CUSIP 912810RL4, creating a 29-year, 4-month Treasury Inflation Protected Security. If you are interested, noncompetitive bids need to be placed by noon. The auction closes at 1 p.m. Thursday.

The TIPS carries a coupon rate of 0.750%, set at the original auction on Feb. 19, 2015. Because tomorrow’s auctioned yield to maturity will be higher, buyers will be getting it at a sizable discount. This TIPS is trading right now on the secondary market, so we can get an idea where it stands.

•  Bloomberg’s Current Yields page shows it with a real yield (after inflation) to maturity of 1.23% and a price of about $88.16 for $100 of value.
• The Wall Street Journal’s Closing Prices page show it closing today with a real yield of 1.220% and a bid/asked spread of $87.97 to $88.44. This TIPS is the last one listed on that page, maturing 2045 Feb 15.
• The Treasury’s Real Yields Curve page estimates that a full-term 30-year TIPS on Tuesday would have had a real yield of 1.26%. Keep in mind that a full-term 30-year TIPS should yield slightly higher than a 29-year, 4-month TIPS. (Wednesday’s number will be posted in a few hours.)

If the auction were taking place this very minute (3:40 pm Wednesday) it would probably generate a real yield around 1.23% and a price near $88.16. But a lot can change before 1 p.m. Thursday. If this TIPS interests you, I suggest keeping an eye on those links above, plus the current price of the TIP ETF. If the price of that ETF is falling sharply tomorrow, that indicates a higher yield is likely. If it is rising sharply, that indicates a lower yield is likely. If it is neutral, the Bloomberg and Wall Street Journal links should provide a pretty good guide.

The inflation adjustment. Also, keep in mind that this TIPS will have an inflation index of 1.01213% on Oct. 30, the settlement date. That means investors will be buying an extra 1.2% of inflation adjustment, and that will raise the cost. The auctioned yield remains the same, you will just buy a little extra principal.

The Treasury will announce this tomorrow at 10 a.m., but we all know this will be the reopening of CUSIP 912810RL4, creating a 29-year, 4-month Treasury Inflation Protected Security. Because it has a established coupon rate of 0.75%, it is going to auction at a substantial discount. Here is the history of this TIPS:

• First auctioned Feb. 19, 2015, with a real yield of 0.842%. That set up the coupon rate of 0.750% – the coupon is always set at the 1/8% notch below the yield set at auction. And so it sold at a price of about $97.93 for $100 of value. (This shows how even a minor interest rate adjustment causes a big swing in price for a 30-year Treasury.)
• It was reopened June 18, 2015, with a real yield of 1.142%, 30 basis points higher. That resulted in an adjusted price of $90.59 for about $100.47 of value (figuring in accrued inflation). The unadjusted price was $90.17, meaning this TIPS lost almost 8% of its value in four months.

Where does it stand today? Because this TIPS trades on the secondary market, we can get a good estimate of its current value, one week ahead of the auction.

• Bloomberg’s Current Yields page shows that this TIPS is trading with a real yield of 1.17%, not too far off that June number. The price is quoted at $89.34 for $100 of value.
• The Wall Street Journal’s Closing Prices page shows this TIPS – which matures 2045 Feb 15 – closed today with a yield of 1.174% and an asked priced of about $89.50.
• The Treasury’s Real Yields Curve page estimates that a full-term 30-year TIPS closed today with a real yield to maturity of 1.19%. This is in line with the other numbers, since a full-term TIPS should yield higher than one maturing 8 months earlier.

The inflation adjustment. Keep in mind that this TIPS will have an inflation index of 1.01213% on Oct. 30, the settlement date. That means investors will be buying an extra 1.2% of inflation adjustment, and that will raise the cost. The auctioned yield remains the same, you will just buy a little extra principal.

Prospects. I recommend buying TIPS and holding them to maturity, so if a 30-year TIPS fits into your expected lifespan, this TIPS could be interesting. The coupon rate of 0.750% will mean you won’t be collecting much in cash payments, however. This TIPS is probably best suited to a tax-deferred account.

If you are buying as a trader, you can see that a 30-year TIPS is a very volatile investment. Do you think long-term interest rates are peaking? Then this is a buy. If you think they will rise higher, hold off and look at the next 30-year auction, in February 2016.

Here is the history of all 29- to 30-year TIPS auctions:

The Treasury jumped the gun – it never does that – and posted results of today’s auction of a 10-year TIPS reopening three minutes early! It’s Friday, folks, and the Treasury people are ready to go home.

The reopening auction of CUSIP 912828XL9 – creating a 9-year, 10-month Treasury Inflation Protected Security – resulted in a real yield to maturity (after inflation) of 0.60%.

Because this TIPS has a coupon rate of 0.375%, buyers are getting it at a discount. The unadjusted price was $97.86 for $100 of par value. But because this TIPS will have an inflation index of 1.00637 at the settlement date of Sept. 30, the adjusted price rises to about $98.49 for $100.64 of value.

The yield of 0.60% is the highest for any 9- to 10- year TIPS since an auction in September 2014, but it is about 15 basis points below the market rate on Thursday, the originally-scheduled date of the auction. The Treasury delayed the auction by one day because of the imminent interest-rate announcement by the Federal Reserve.

The Treasury did well by delaying. The Thursday price would have been about $96.69, about 1.2% less than the Friday result.

Inflation breakeven rate. A nominal 10-year Treasury is trading right now with a yield of 2.16%, setting up an inflation breakeven rate of 1.56% for this TIPS. It will outperform a traditional Treasury as long as inflation averages more than 1.56% over the next 10 years. This puts this TIPS solidly in the ‘cheap’ range – a good buy versus a traditional Treasury.