30-Year TIPS: Poster Child For A ‘Volatile’ Safe Investment

Summary

  • The Treasury will reopen CUSIP 912810SM1 in a Thursday auction, creating a 29-year, 6-month TIPS.
  • The real yield looks likely to be around -0.26%, making this the first TIPS of this term to get a negative real yield.
  • Investors will probably pay a huge premium, about 16% above par value. This TIPS isn’t attractive for a buy-and-hold-to-maturity investor.
  • But for a TIPS trader, it might have speculative appeal.

The U.S. Treasury will be offering $7 billion Thursday in a reopening auction of CUSIP 912810SM1, creating a 29-year, 6-month Treasury Inflation Protected Security. Do I think you should invest in this TIPS? No. But let’s look at it anyway.

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30-year TIPS yield

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July Inflation: What It Means For Social Security, TIPS And I Bonds

Summary

  • In a surprise, July inflation came in much higher than the consensus for both all-items and core inflation. Gas prices again were a big factor.
  • The recent surge in inflation now has the Social Security COLA on track for a 1.0% increase in 2021. But two volatile months of data remain.
  • I Bond investors now look likely to get a positive inflation-adjusted variable rate at the November 1 reset.

U.S. inflation in July blew by consensus forecasts, reflecting strong price increases in many categories across the economy, even though food prices declined in the month.

The Consumer Price Index for All Urban Consumers increased 0.6% in July on a seasonally adjusted basis, the same increase as in June, the U.S. Bureau of Labor Statistics reported today. That was double the expected increase of 0.3%.

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12-month inflation trend

 

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TIP ETF: Inflation Protection, With A Side Of Risk

Summary

  • The overall TIPS market has had a huge run-up of almost 16% since the bond market turmoil of mid-March.
  • The TIP ETF hit a record high of $126.51 last week, but its one-year performance has been in line with other big bond funds.
  • This ETF is not diversified, with only 42 holdings of a single type of U.S. Treasury. It is more volatile than core bond funds.

The iShares TIPS Bond ETF (TIP), which holds the full range of Treasury Inflation-Protected Securities, has had a huge run-up in the last five months, rising almost 16% since it closed at $108.81 on March 18, a day of intense market turmoil. On Thursday, August 6, it closed at a record high of $126.51.

Many readers have been asking me: After this year’s big run-up, is it too late now to begin investing in TIPS?

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TIP ETF year to date

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New 10-Year TIPS Gets Real Yield Of -0.93%, Lowest In History

Summary

  • There have been 104 auctions of this 9- to 10-year term since 1997 and today’s result was a record low yield, by a large margin.
  • The inflation breakeven rate came in at 1.52%, a reasonable number but higher than recent trends. Inflation expectations are slowly rising.
  • Reaction to the auction looked mixed, with TIPS yields rising slightly after the auction’s close at 1 p.m. EDT.

The U.S. Treasury just completed its auction of $14 billion in a new 10-year Treasury Inflation-Protected Security, with a historic result: A real yield to maturity of -0.93%, the lowest in the 23-year history of TIPS auctions of this term.

This is CUSIP 912828ZZ6, and it got a coupon rate of 0.125%, the lowest the Treasury will allow for a TIPS. That means investors at today’s auction had to pay a huge premium for this TIPS: an adjusted price of about $111.03 for about $100.01 of value, after accrued inflation and interest are added in.

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10-year TIPS auctions

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There Are Reasons To Like This New 10-Year TIPS

Summary

  • The real yield for CUSIP 912828ZZ6 could end up around -0.82%, the lowest in the 23-year history of TIPS auctions of this term.
  • Fears of future inflation – spurred by massive monetary and fiscal stimulus programs – should attract investors.
  • The inflation breakeven rate will be around 1.46%, a reasonable number. But if the inflation hawks are right that 1.46% number will look very attractive.

Here’s the question: Would you prefer a 10-year TIPS yielding 0.82% less than inflation or a 10-year Treasury note with a nominal yield of 0.64%? And how will these investments perform under a scenario of possible rising inflation?

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TIPS auction history

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U.S. Inflation Surged 0.6% In June, Powered By Higher Gas Prices

Summary

  • Both all-items inflation and core inflation rose faster in June than the consensus estimates.
  • Will any of this alter the Federal Reserve’s commitment to ultra-low interest rates? No.
  • The June inflation report offers a glimmer of hope for a small increase in the Social Security COLA in 2021.

Even though financial markets have been signaling deflationary doom in recent months, U.S. inflation rose a brisk 0.6% in June, primarily caused by a sharp rise in gasoline prices.

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All items versus core inflation

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Social Security COLA Is Diving Toward Zero

Summary

  • The Social Security Administration uses an esoteric inflation index and only three months of data to determine the COLA.
  • As of the May inflation report, the COLA would be set to zero. But May’s number is pretty much irrelevant to the final calculation.
  • Should we expect inflation or deflation in coming months? Most experts expect deep deflation, but could mild inflation sneak into the picture?

You might think the Social Security Administration’s annual cost-of-living adjustment for Social Security benefits is based some sort of index that accurately reflects “official U.S. inflation.” That would be wrong.

You might also think the SSA’s COLA is based on some sort of 12-month year-over-year calculation of annual inflation. That would be wrong, too.

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Charting Social Security COLA

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5-Year TIPS Reopening Gets Real Yield Of -0.766%, Lowest Since 2013

Summary

  • Demand looked strong at this auction, with the real yield falling about 7 basis points from the secondary market’s yield earlier in the morning.
  • The inflation breakeven rate came in at 1.10%, a reasonable number given our uncertain deflationary future.
  • A 5-year TIPS is still a more attractive investment than a 5-year nominal Treasury note, currently yielding 0.33%. But there are alternatives.

The U.S. Treasury just announced that its reopening auction of a 5-year TIPS, CUSIP 912828ZJ2, resulted in a real yield to maturity of -0.766%, the lowest for this term at auction since April 2013.

The “real yield to maturity” indicates how this 4-year, 10-month Treasury Inflation-Protected Security will perform against official U.S. inflation. Investors at Thursday’s auction were willing to accept a return that will trail inflation by 0.766% over nearly five years.

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5-year TIPS

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5-Year TIPS Reopening Heads Toward Worst Yield In 7+ Years

Summary

  • The real yield looks likely to drop to about -0.65%, the lowest yield for any auction of this term since April 2013.
  • The inflation breakeven rate is running at about 0.98%, up from recent lows but still attractive as an alternative to nominal Treasurys.
  • Better alternatives? Clearly, the U.S. Series I Savings Bond is superior to a 5-year TIPS. Another choice would be to ride out this deflationary period in a 1-year bank CD.

Just when it seems we really need inflation protection, investments in inflation protection are looking awful. Or, more accurately, just when it seems like we need safe investments, safe investments are looking awful.

Welcome to June 2020 in our virus-stricken United States.

The U.S. Treasury on Thursday will offer $15 billion in a reopening auction of CUSIP 912828ZJ2, creating a 4-year, 10-month Treasury Inflation Protected Security. Depending on how you look at our nation’s near-term future, this offering is either enticing (for solid reasons) or total garbage (also for solid reasons). I’m leaning 75% toward garbage.

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5-year TIPS History

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Deflationary Trend Continues As May Inflation Fell -0.1%

Summary

  • Price declines reflected the effects of COVID-19 shutdowns, with gas prices falling, along with prices of auto insurance, air travel, apparel and lodging away from home.
  • Price increases hit more necessary items: Food, shelter, medical care and, alcohol.
  • How long with this deflationary trend continue? If gasoline prices increase sharply in summer months, inflation could hold nearly flat.

The May inflation report, just released by the Bureau of Labor Statistics, offers an unnerving glimpse at the volatile U.S. economy, with prices rising dramatically in some sectors and falling dramatically in others.

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