Treasury Inflation-Protected Securities

• Update: Treasury Maintains The I Bond’s Fixed Rate At 0.1% from May to October

Yeah, I know. I have been in the wait-until-November camp, especially when it looked like the I Bond’s variable rate could fall to the negative on May 1. Instead it will reset to 0.16%, which was determined by the March inflation report.

The other factor was watching yields on the 5-year TIPS – an investment I consider very similar to an I Bond – dropping into negative real returns. When that happens, even a fixed rate of 0.0% on an I Bond is preferable to a 5-year TIPS. Plus you get tax-deferred income, a flexible maturity date and better protection against deflation.

Today’s auction of a new 5-year TIPS resulted in a real yield to maturity of -0.195%. Do the math. That’s 29 basis points lower than the I Bond’s current fixed rate of 0.10%  So I Bonds have suddenly gotten attractive again, even with a fixed rate of 0.1%.

But here’s the problem: that fixed rate might to drop to 0.0% on May 1. I think the odds are 50/50, and there’s no chance the fixed rate would rise to 0.2% or higher (my opinion – and I don’t work for the Treasury.)

Read my analysis on SeekingAlpha.com:

I Bond Investors: Is April The Month To Pull The Trigger On Your 2016 Allocation?

The Treasury will be creating CUSIP 912828Q60 today – a new 5-year TIPS. The coupon rate and real yield to maturity will be set at the auction.

Here’s how the auction is shaping up:

• The Treasury’s Real Yields Curve page estimates that a full-term 5-year TIPS would have yielded -0.17% at the market close Wednesday. For a new issue, this is the estimate I trust the most, but you have to also add in today’s open market trends.
• Bloomberg’s Current Yields page shows that a TIPS with 4 years remaining to maturity is trading this morning with a real yield of -0.29%. That’s substantially lower than the Treasury estimate, but the term is also one-fifth shorter.
• The Wall Street’s Closing Prices page shows that this 4-year TIPS, which matures in April 2016 – closed Wednesday with a yield of -0.294% and price of about $101.62 for $100 of value. That’s very close to Bloomberg’s real-time quote.
• The TIP ETF is trading down very slightly this morning, which would indicate slightly higher yields.

I can say with certainty that this new 5-year TIPS will get a coupon rate of 0.125%, the lowest the Treasury will go. The yield will end up negative to inflation, I would guess somewhere around -0.20%. So buyers at today’s auction will have to pay a premium for the 0.125% coupon rate.

I would argue that investing in a US Savings I Bond with a fixed rate of 0.1% – available through April 30 – is easily the better investment. Do the math: 0.10% above inflation beats 0.20% below inflation.

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.