Treasury Inflation-Protected Securities

• FRNs, 2-year Treasury investments, have been in the news recently because their yields topped all Treasury investments with terms up to 10 years.
• FRNs are attractive during a time of rising interest rates, especially for cash you know you will be holding for two years.
• But during a period of declining rates – which could be coming – shorter-term investments give you more flexibility, with just a small yield penalty.

On May 31, a typical FRN was yielding about 2.4% while the 10-year Treasury yield had dropped to 2.14%. That means FRNs currently have about a 25 basis-point advantage over a 10-year Treasury. That’s a pretty remarkable example of yield inversion, because the FRN’s base interest rate matches the current 13-week Treasury.

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• The 0.3% increase in the Consumer Price Index fell slightly below the consensus estimate, so no shock to the markets.
• Core inflation rose at an annual rate of 2.1%, showing that inflation exists outside of rising gasoline prices.
• Good news for holders of TIPS: June principal balances will rise by 0.53%, following increases of 0.56% in June and 0.43% in May.

The April inflation report again pointed to energy costs as the primary driver of U.S. inflation. The gasoline index rose 5.7% for the month, and is now up 3.1% over the last 12 months, reversing a long trend of declining prices.

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Also, I’ve updated my Tracking Inflation and I Bonds page with the new numbers.

And I updated the TIPS Vs. Nominals page with results for the 5-year TIPS that matured in April. That TIPS under-performed a nominal Treasury by 0.34% a year.

And here are the new June Inflation Indexes for all TIPS.

• The new schedule adds a second new 5-year TIPS to the 2019 auction lineup. One 30-year TIPS reopening has been removed.
• The new lineup allows the Treasury to offer larger auctions, more frequently, meeting its needs to raise funds to meet higher deficits.
• It’s a good move for small-scale investors, because the 5-year TIPS is currently the most attractive offering.

While preparing a chart of upcoming auctions of Treasury Inflation-Protected Securities a few weeks ago, I noticed something odd: The Treasury had scheduled a 5-year TIPS reopening in June, in the spot normally reserved for a 30-year TIPS reopening.

Was it a typo? Or was the schedule changing? An alert reader also noticed this change and pointed to this wording on an obscure page of TreasuryDirect:

We auction 5-year TIPS in April, June, October, and December; 10-year TIPS in January, March, May, July, September, and November; and 30-year TIPS in February, and August.

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• Last April, a similar auction generated a real yield of 0.631% and a coupon rate of 0.625%, both better results than today’s.
• The inflation breakeven rate came in at 1.86%, a fair number in today’s time of muted inflation.
• A mild market reaction indicates this was a solid auction, and investors can be pleased by snagging a 0.50% coupon rate.

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