Treasury Inflation-Protected Securities

Summary

• The U.S. Treasury did the right thing today, keeping I Bonds and EE Bonds very attractive investments, for different reasons.
• I Bonds purchased from November 2020 to April 2021 will earn a composite annualized interest rate of 1.68% for six months.
• EE Bonds continue to have a fixed rate of 0.1% but will double in value after 20 years, providing an effective annual return of 3.5%.

Whew, no surprises.

The U.S. Treasury just announced it is holding the fixed rate for U.S. Series I Savings Bonds at 0.0%, ending speculation that it could set a negative fixed rate for the I Bond for the first time in history. It also retained very generous terms that allow the Series EE Savings Bond to double in 20 years, earning an effective interest rate of 3.5%, much higher than market rates.

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Summary

• The result, which dipped below recent market indicators, was the second-lowest real yield for any TIPS auction of this term.
• Investors had to pay a sizable premium for this TIPS, about 7.5% above par value, to collect a coupon rate of 0.125% (plus future inflation accruals).
• The inflation breakeven rate climbed to 1.69%. TIPS real yields have been declining at the same time nominal yields are rising.

The Treasury’s offering of $17 billion in a new five-year Treasury Inflation-Protected Security – CUSIP 91282CAQ4 – auctioned Thursday with a real yield to maturity of -1.32%, lower than expected by about 10 basis points.

That real yield (meaning the yield after inflation is calculated in) is the second lowest in the history of TIPS auctions of this term. The lowest ever was -1.496%, set by a reopening auction on Dec. 20, 2012.

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Summary

• The U.S. Treasury will offer a new 5-year TIPS at auction Thursday.
• The real yield looks likely to come in around -1.21%, which is pretty awful but isn’t a record low.
• The only way to judge this TIPS is to compare it with other very safe investments of similar term. How does it measure up?

The U.S. Treasury on Thursday will offer $17 billion at auction in a new 5-year Treasury Inflation-Protected Security, CUSIP 91282CAQ4. The real yield to maturity and coupon rate will be set by the auction, but we already know, the terms are going to look fairly awful.

But in the current environment of ultra-low interest rates for safe investments, this TIPS should be considered “above average.” Why? Because it provides a hedge against unexpected future inflation.

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Summary

• We now know the I Bond’s next inflation-adjusted variable rate, which is rising to 1.68% from the current 1.06%.
• The permanent fixed rate, currently 0.0%, will be reset on November 1, but is highly likely to remain at 0.0%.
• The I Bond’s current terms allow it to be used as an 11-month investment that will outperform other safe short-term investments.

Everyone knows I am a big fan of U.S. Series I Savings Bonds, an investment offering returns that will track inflation closely with total safety, tax-deferred interest and solid protection against deflation.

Right now, in our interest-rate-suppressed environment of October 2020, I Bonds have become an attractive short-term (meaning 11-month) investment, while retaining the option to hold them much longer, up to 30 years.

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Summary

• Social Security payments will increase 1.3% in January, adding about $20 a month for the average recipient. However, a hike in Medicare premiums could wipe out part of that increase.
• The inflation-adjusted variable rate for U.S. Series I Savings Bonds will be reset to 1.68% for purchases after November 1, up from the current 1.06%.
• U.S. inflation increased 0.2% in September, matching expectations. Gasoline prices held almost steady for the month.

The September inflation report, released Tuesday morning, is by far the most important report of the year, because it sets both the cost-of-living adjustment for Social Security and also the future inflation-adjusted rate on U.S. Series I Savings Bonds.

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