Treasury Inflation-Protected Securities

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.

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.