Treasury Inflation-Protected Securities

The Treasury announced today that, as expected, it will auction on June 21 a reissue of the 30-year Treasury Inflation-Protected Security, CUSIP 912810QV3. The result will be a 29-year, 8-month maturity. Here is the fact sheet, which points out that the coupon rate is 0.75%, and the final maturity is February 15, 2042.

What can we expect. Back in January, this new issue auctioned at a rate to maturity of 0.777%, very close to the coupon rate. While that rate was the lowest ever for a 30-year TIPS, it looks slightly more attractive today, after months of financial turmoil overseas.  On the secondary market today, this TIPS is trading with a yield of 0.516%, so it looks like next’s week auction will set another record low.

Record lows aren’t a surprise. The rate on a traditional 30-year Treasury closed today at 2.73%, creating a break-even rate for this issue of about 2.2%. Do you think inflation is likely to exceed 2.2% over the next 30 years? If so, this issue might be attractive, at least more attractive than a traditional 30-year Treasury.

The fact is, it is very difficult to find any super-safe investment paying a premium to inflation. (Even I Bonds – my favorite investment at the moment, up to your purchase limit – can only match inflation. But I still recommend buying I Bonds first, then TIPS.) And while inflation is an insignificant threat today, over the next 30 years it could very well ignite into something frightening.

If you have been building a ladder of TIPS, this issue at least gives you a plus to inflation for your overall return. Hard to find that in 2012, and I don’t expect things to get better anytime soon.

If you were a buyer back in January (I wasn’t), I can’t see any problem with adding to your position with this TIPS.

If you were not a buyer then, I can’t see this reissue as attractive.

The Treasury just announced that Thursday’s reissue of a 10-year TIPS, CUSIP 912828SA9, auctioned with a yield to maturity of -0.391%, meaning that buyers were accepting a return that will lag inflation by 0.391% over 10 years.

This TIPS will mature on Jan. 15, 2022, making it a 9-year, 8-month issue. It carries a coupon rate of 0.125%,  so today’s buyers will pay up — about $105.07 for $100 of value, resulting in the negative yield.

The previous record low yield for a 9- to 10-year TIPS was for this same TIPS, when it was reissued in March at a yield to maturity of -0.089%. This TIPS originated way bay (ancient history) in January 2012 with a yield of -0.046%. (Thanks to commenter Bob for pointing out the March reissue.)

U.S. Treasury can celebrate. The yield on this TIPS was dragged down by economic turmoil in Europe, which sent the yield on a traditional 10-year Treasury plummeting, down to 1.70% today, the lowest rate of the year.

That set the breakeven rate at a still-reasonable 2.091%, meaning buyers of this TIPS will do better than buyers of a traditional Treasury if inflation averages more than 2.091% over the next 10 years. This auction also seems to be pricing in further Fed stimulus, which would 1) bolster artificial demand for Treasuries and 2) strike a match to fears of future inflation. Both of those prospects would benefit TIPS, but like I said, the market has already priced them in.

From the Wall Street Journal report:

Richard Gilhooly, rates strategist at TD Securities, says that the strong demand suggests investors’ hopes for another round of monetary stimulus are rising. “The QE3 trade appears to be shaping up after the FOMC minutes took a step closer last night,” he said.

The impressive auction results came amid a broad flight into U.S. government bonds. The regular Treasurys market has rallied throughout the session, dragging the yields on 10-year notes and 30-year bonds to new lows for the year. The fact that investors are seeking the safety of bonds issued by the U.S. government is likely another reason why the auction went as well as it did.

U.S. consumer prices were flat last month as cheaper gas offset modest increases for food, clothing and housing. This continues the recent trend of mild ‘official’ inflation – running at just 2.3% over the last year – despite volatile gasoline and food prices.

Gas prices fell 2.6 percent in April, the biggest decline in six months. Food prices and housing costs both ticked up 0.2 percent.

From the Associated Press report:

The Labor Department says the seasonally adjusted consumer price index was unchanged in April, after a 0.3 percent gain in March. Excluding volatile food and gas costs, so-called “core” prices rose 0.2 percent. That was the same as in March.

Over the past 12 months, prices have risen 2.3 percent, the smallest increase in more than a year. Core prices have also risen 2.3 percent in the past year, close to the Federal Reserve’s inflation target of 2 percent.

TreasuryDirect.gov just posted the new I Bond rate – 2.20% – that will hold for purchases through Oct. 31, 2012. That is down from the rate of 3.06% that held from November 2011 through April 2012.

I Bonds pay an interest rate that combines two factors: 1) the base rate, which has been set at zero since November 2010, and 2) a rate set to match the rate of inflation. Each semiannual inflation rate applies to all outstanding I Bonds for six months.

Obviously, I Bonds have lost a bit of their appeal. The time to buy your 2012 allotment ($10,00 limit per person, or $20,000 for a couple) was before the May 1 rate change.

I Bonds are unusual in that they pay the existing rate for six months, no matter when you buy them. So a purchase April 30 would pay 3.06% for six months (and then 2.2% for the next six months). A purchase May 1 would pay 2.2% for six months, then a rate to be determined on Nov. 1 for the next six months.