Treasury Inflation-Protected Securities

• Both headline and core inflation numbers came in higher than expected, indicating inflation is not ‘dead’ and deflation is not looming.
• The July number sets a path for a 1.6% to 1.8% increase in the 2020 Social Security cost-of-living adjustment.
• At this point, with two months of data remaining, the I Bond’s variable rate will be higher than the current rate of 1.4%. It will be reset on November 1.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3% in July on a seasonally adjusted basis, the U.S.Bureau of Labor Statistics reported today. Over the last 12 months, “headline” inflation increased 1.8%.

Read my full analysis on SeekingAlpha.com

• The Social Security Administration uses a complex formula, and an unusual inflation index, to set the annual COLA increase.
• Once again, the Social Security COLA looks like it will be lower than overall U.S. inflation. (That wasn’t true for the 2019 increase, however.).
• At this point, a COLA increase in the range of 1.6% to 1.8% looks likely, but a lot can change in the only months that matter: July, August and September.

In its annual report issued in April, the Social Security Administration projected a likely 1.8% cost-of-living-adjustment (COLA) for Social Security recipients in 2020. That looks like a reasonable estimate, but possibly a bit high.

The COLA formula is ridiculously complex and little understood. Is it related to U.S. inflation? Yes, but not the inflation index you hear about each month. Does it reflect 12 months of U.S. inflation? Not really. Does it underestimate actual U.S. inflation? Most years, yes.

Read my full analysis on SeekingAlpha.com

• The real yield is likely to come in around 0.35%, more than 60 basis points below where these yields started the year.
• The inflation break-even rate was about 1.77% as of Friday. That might seem low, but it is a fair reflection of current inflation.
• The superior alternative is the U.S. Series I Savings Bond, currently offering a real yield of 0.50%, tax-deferred interest and a flexible maturity.

The U.S. Treasury will offer a new 10-year Treasury Inflation-Protected Security – CUSIP 9128287D6 – in a $14 billion auction Thursday, with the real yield likely to fall substantially below recent results for this term.

Read my full analysis on SeekingAlpha.com

• The monthly “headline” inflation number and core inflation for the month and year all came in higher than the consensus forecasts.
• Overall U.S. inflation is being held down by declining gasoline prices, but core inflation is running at 2.1%, which is clearly “moderate” inflation.
• The Federal Reserve probably won’t be swayed by these numbers, and will remain on track to begin lowering short-term interest rates this year.

The Consumer Price Index for All Urban Consumers increased 0.1% in June on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, “headline” inflation increased 1.6%.

Read my full analysis on SeekingAlpha.com

• Both real and nominal yields have plummeted in 2019, with nominal yields on government debt dipping into the negative in Europe and Asia.
• Returns on I Bonds and EE Bonds still have the same terms that the Treasury set in November 2018 and have now become much more attractive by comparison.
• I Bonds are the best inflation-protected Treasury investment with a maturity under 20 years. EE Bonds are the best nominal Treasury investment with a maturity of 20 or more years.

Read my full analysis on SeekingAlpha.com

• Five-year real yields have dropped nearly 100 basis points in the last six months. That’s a huge move in anticipation of Federal Reserve rate cuts.
• Today’s real yield of 0.152% had to be a disappointment to investors, who also had to pay a premium price for this TIPS.
• The five-year inflation breakeven rate climbed a bit to 1.60%, indicating somewhat stronger demand for inflation protection.

The Treasury’s $15 billion reopening auction of CUSIP 9128286N5 – creating a 4-year, 10-month Treasury Inflation-Protected Security – generated a real yield of 0.152%, dramatically lower than recent auctions of this term.

Read my full analysis on SeekingAlpha.com

• Expect volatility in the Treasury market this week because the Federal Reserve’s Open Market Committee will issue a statement Wednesday, one day before the auction.
• At this point, CUSIP 128286N5 is heading toward a real yield of about 0.35%, 78 basis points below a similar auction in December. Buyers will be paying a premium price.
• A very low inflation breakeven rate of about 1.48% should bring strong market demand for Thursday’s auction.

The U.S. Treasury on Thursday will reopen CUSIP 9128286N5, auctioning $15 billion of a 4-year, 10-month Treasury Inflation-Protected Security. This is an especially interesting auction because it follows six months of rather dramatic yield declines.

Read my full analysis on SeekingAlpha.com