Treasury Inflation-Protected Securities

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.

Like I always say .. a lot can happen in a week. Or even days. What was shaping up to be a very attractive auction today – creating a 9-year, 10-month Treasury Inflation-Protected Security – has turned a bit sour.

On Wednesday, the August inflation report became a deflation report, with prices dipping 0.1% for the month. Deflation isn’t a good thing in the TIPS market, and that sent the TIP ETF dipping below my long-watched $110 level. The yield on a 10-year TIPS hit 0.73%, highest of the year.

But  the deflation news bolstered spirits for the Federal Reserve’s interest rate ‘doves.’ On Thursday, the Federal Reserve put off raising short-term interest rates, which have been set at near-zero for nearly seven years. And the TIPS market cheered. The yield on a 10-year TIPS dropped 10 basis points, to 0.63%.

And now it’s Friday, auction day. Let’s see where we stand at 9:45 a.m.:

• Today’s auction is a reopening of CUSIP 912828XL9, with a coupon rate of 0.375%. Bloomberg’s Current Yields page shows it is trading this morning with real yield to maturity of 0.58% and a price of about $98 for $100 of value.
• The Wall Street Journal’s Closing Prices page shows this TIPS ended Thursday with yield of 0.604% and a price around $97.50.
• The TIP ETF opened up this morning — it is up more than 1% in two days. That means lower yields.

That one day delay – costly for investors, great for the Treasury.

If this TIPS had been auctioned at its normal time, closing at 1 p.m. Thursday, it would have generated a real yield of about 0.75% – the highest number in more than four years of 9- to 10-year TIPS auctions.

Instead, it will now go off somewhere around 0.58% — 18 basis points lower. It will cost investors more than 1% more than it would have 24 hours ago. This TIPS closed Wednesday with a price of about $96.69. Today’s price could be right around $98.

Amazing.

Although I already have a small investment in CUSIP 912828XL9, I’ll be skipping this auction. This TIPS will be reopened one more time – in November.