Treasury Inflation-Protected Securities

Up next: Treasury will reopen 5-year TIPS at auction Dec. 17, 2015

Posted on December 10, 2015 by Tipswatch

This is CUSIP 912828K33, a 4-year, 4-month TIPS, the shortest term you can buy at an auction. This TIPS was originally created April 23, 2015, with a coupon rate of 0.125% and a real yield to maturity of -0.335%. In my preview article for that April auction, I noted the likely negative yield and said, ‘small investors will pass and look for better alternatives.’

But a lot has happened in eight months, and this ugly duckling TIPS has turned into something a lot more attractive. The real yield (after inflation) for this TIPS on the secondary market is up about 63 basis points since the original auction.

Bloomberg’s Current Yields page shows it trading today with a yield to maturity of 0.39% and a price of about $98.91 for $100 of value.
The Wall Street Journal’s Closing Prices page shows this TIPS – which matures in April 2020 – closed yesterday with a yield of 0.33% and a price around $99.
The Treasury’s Real Yields Curve page estimates that a full-term 5-year TIPS would have yielded 0.43% at the close yesterday. (The yield on a full-term 5-year should be slightly higher than that of a 4-year, 4-month TIPS, so that explains the higher number.)

TIPS yields have been flattening out. The Treasury’s estimate of the 10-year yield is 0.69%, only 26 basis points higher than the 5-year. One factor is that the market expects a Fed-driven increase in short-term interest rates this month. The Federal Reserve’s announcement could come on the afternoon of Dec. 16 – just hours before this auction. And on Dec. 15, we’ll get the November inflation report. It’s going to be a very interesting week.

Another reason for the flattening yield curve is the expectation for continuing low inflation – or even mild deflation – in the near term. Deflation can cut into a TIPS’ return, especially in a reopening auction, where the buyer is purchasing additional, inflation-adjusted principal. This TIPS will have an inflation index of 1.01563 on the settlement date of Dec. 31. That means buyers will be purchasing about 1.5% of additional principal. Deflation in coming months could cut into that principal balance.

On the other hand, the effect of gas prices, which has been pulling inflation down over the last 12 months, it about to be neutralized, since year-over-year price drops will be much smaller in 2016. Take a look at this 5-year chart of US gas prices:

Unless gas prices fall dramatically lower in coming months – which seems unlikely – inflation will begin gaining ground. And if that happens, a 4-year, 4-month TIPS looks like a reasonable investment.

Since mid-2011 – when shorter-term TIPS yields began falling deeply negative – I have been recommending buying US Savings I Bonds over a 5-year TIPS. But right now, with a TIPS yielding about 0.4% above inflation, versus 0.1% for an I Bond, I think TIPS again have the advantage.

If this auction generates a yield of 0.4%, it would be highest yield for any 4- to 5-year TIPS at auction since April 2010 – more than five years.

Here is a chart of all 4- to 5-year TIPS auctions since 2007:

Posted in I Bond, Inflation | 4 Comments

10-year TIPS reopening auctions with a real yield of 0.664%

Posted on November 19, 2015 by Tipswatch

Here’s the announcement from the US Treasury.

This was the reopening of CUSIP 912828XL9, creating a 9-year, 8-month TIPS with a coupon rate of 0.375%. The resulting real yield to maturity was 0.664%, just barely beating a couple of 2014 auctions to become the highest yield for any 9- to 10-year TIPS auction since May 2011.

Because the yield was higher than the coupon rate, this TIPS auctioned with an adjusted price of $97.64 for $100.34 of value. The adjusted price includes inflation increases since the original auction in July.

Inflation breakeven rate. This 10-year TIPS ended up closing the day with a real yield of 0.65%, compared to a 2.25% yield on a nominal 10-year Treasury. That creates an inflation breakeven rate of 1.60%, which is a bit higher than the norm in recent weeks, indicating that demand is rising for TIPS versus nominal Treasurys. But it is still solidly in the ‘cheap’ range, meaning it is a good buy versus a nominal. If inflation averages more than 1.6% over the next 10 years, this TIPS will outperform the nominal 10-year.

This 5-day chart of the TIP ETF versus IEI (intermediate Treasurys) shows how TIPS have surged against nominal Treasurys. That wasn’t a favorable trend for buyers at today’s auction:

5day

I wasn’t a buyer at today’s auction, although I was watching it with a lot of interest. If the yield looked like it would climb above 0.75%, I might have taken a bite. But I ended up sitting this one out.

December will bring the last TIPS auction of the year, the reopening of a 5-year TIPS on Dec. 17. The current yield of about 0.35% is pretty attractive for a 4-year, 4-month investment. But that yield is pricing in some potential deflation in the near term. It will be one to watch.

Posted in Investing in TIPS | Leave a comment

Checking in on Thursday’s 10-year TIPS reopening

Posted on November 18, 2015 by Tipswatch

I’ll be working Thursday (starting at 6 a.m.!) and I won’t be able to post before the auction and I’ll only be able to post the result – minus analysis – after it closes at 1 p.m. Sorry! But here’s a look ahead at the reopening of CUSIP 912828XL9, creating a 9-year, 8-month TIPS with a coupon rate of 0.375%:

This TIPS, which trades on the secondary market, is currently trading with a real yield of 0.69%, according to Bloomberg’s Current Yields page. This is down about 7 basis points from where it was last week. It is priced at $97.06 per $100 of value, up from $96.39 last week.
The Wall Street Journal’s Closing Prices page shows that this TIPS – which matures 2025 Jul 15 – closed today with a real yield of 0.673%.
The Treasury’s Real Yields Curve page estimates that a full-term 10-year TIPS would have yielded 0.71% at the market close today. A full 10-year TIPS should yield slightly higher than one maturing in 9 years, 8 months.

So the yield trend has been working against investors in the last week. Tomorrow morning, before you make your decision, check that Bloomberg link above and also the price of the TIP ETF. The price rose today to $110.08. If it is rising again tomorrow morning, that will indicate a lower yield at auction.

The 10-year inflation breakeven rate is still sitting at a very low 1.58%, making this TIPS attractive against a traditional Treasury. I suspect there could be fairly strong demand for this TIPS, and that could also lower the yield.

I’ll post the result after the close at 1 p.m. Thursday.

Posted in Investing in TIPS | 3 Comments

US inflation rises 0.2% in October

Posted on November 17, 2015 by Tipswatch

I am at work today so I can only post the facts:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2% in October on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 0.2% before seasonal adjustment.

Non-seasonally adjusted inflation – which is used to adjust the principal balance of Treasury Inflation-Protected Securities and set future interest rates on US Savings I Bonds – decreased a slight 0.04% in October, and was up 0.2% over the last 12 months.

I have updated my Tracking Inflation and I Bonds page to reflect these new numbers.

Posted in Investing in TIPS | 3 Comments

Up next: 10-year TIPS reopens at auction Nov. 19, 2015

Posted on November 12, 2015 by Tipswatch

The US Treasury just announced that it will reopen CUSIP 912828XL9 at auction on Nov. 19, creating a 9-year, 8-month Treasury Inflation-Protected Security. This TIPS, which first auctioned on July 23, carries a coupon rate of 0.375%.

It will be going off at a discount, because yields on 10-year TIPS have risen a bit in recent months. Here is what we know from the secondary-market trading in CUSIP 912828XL9:

Bloomberg’s Current Yields page shows it trading this morning with a real yield to maturity of 0.76% and a price of about $96.39 for $100 of value.
The Wall Street Journal’s Closing Prices page shows that this TIPS – which matures 2025 Jul 15 – closed yesterday with a real yield of 0.725% and an ask price of about $96.75 per $100.
The Treasury’s Real Yields Curve page estimates that a full-term 10-year TIPS would have closed yesterday with a yield of 0.77%.

Those numbers indicate that – a week out from the auction – this TIPS is yielding around 0.765%, plus inflation, resulting in a cost of around $96.50 for $100 of a value. But a lot can happen in a week. If you are interested in this TIPS, you should watch the three links above to judge its current value as Nov. 19 approaches.

Also, note that this TIPS will carry an inflation index of 1.00343 at the settlement date – Nov. 30. That will slightly increase an investor’s cost, but also slightly increase the principal purchased, since the TIPS will carry accrued inflation.

Yield milestone? If the yield of 0.75% holds through the auction, this TIPS will have the highest yield resulting from any 9- to 10-year auction since May 2011. That’s more than four years. I suspect there will be a lot of interest in this auction.

Inflation breakeven rate. A nominal 10-year Treasury is trading today with a yield of 2.32%, creating an inflation breakeven rate of 1.57% if this TIPS goes off at 0.75%. I consider this ultra low. It means this TIPS will outperform a nominal Treasury if inflation averages more than 1.57% over the next 10 years.

Investors are pricing in very low inflation, as shown in this chart, which tracks the 10-year inflation breakeven rate over the last five years:

You can see how rarely implied inflation drops below 1.6%. TIPS are a good buy when that happens, at least versus a nominal Treasury.

Here’s a chart of every 9- to 10-year TIPS auction since January 2009, showing the huge dip in yield beginning in mid-2011, then gradually reversing in 2013 and beyond.