Treasury Inflation-Protected Securities

AllianceBernstein suggests a 60/30/10 portfolio to protect against inflation

Posted on June 3, 2024 by Tipswatch

Investment firm sees ‘higher and spikier’ inflation looming.

By David Enna, Tipswatch.com

AllianceBernstein, a global investment firm with about $725 billion in assets under management, is now advising its clients to replace the traditional 60% stocks / 40% bonds portfolio with a 60/30/10 model, with the 10% being allocated to inflation protection.

AllianceBernstein has its headquarters in Nashville and offices in 26 countries.

The strategy grew out of an April 2 report by two senior bond experts at the firm — Serena Zhou and AJ Rivers — who made the case that inflation protection in the form of Treasury Inflation-Protected Securities is now a “unique opportunity.”

As inflation recedes from recent cyclical highs, many investors are selling their holdings of inflation-protected securities. The result? Explicit inflation protection has become unusually cheap. Investors needing to boost their strategic allocations to inflation strategies may wish to take advantage of this opportunity—securing inexpensive “flood” insurance ahead of higher structural inflation over the coming decade.

The authors theorize that global economies are moving toward an era of “higher and spikier” inflation, triggered by three powerful forces:

Deglobalization, which leads to potential labor shortages, higher labor costs, and potential supply shortages.
Aging demographics, which also shrinks the labor pool.
Climate change, which could drive energy, transportation, insurance, food and other costs higher in the future.

The authors point out that in the last three years, U.S. consumers lost 16% of their purchasing power. While inflation seems to be easing in 2024, the dangers remain:

(W)e think it’s more likely that 2% becomes a lower bound for inflation, rather than a central-bank target. Indeed, it’s highly likely we’ve already entered this new regime … Yet even marginally higher inflation represents a key risk. For example, if inflation persists at just 2.8%, an unprotected investor will have lost 35% of purchasing power 15 years from today.

The authors note: “That’s why, in our view, the wisest defense against unexpected inflation is to maintain a strategic allocation to an active inflation strategy that includes explicit inflation protection in the form of TIPS.”

The price of protection

In the 27-year history of TIPS, the authors note, these securities have yielded an average of 90 basis points below GDP growth. Today, with real yields well above 2% across the TIPS maturity spectrum, TIPS have yields close to or above GDP growth predictions for the next decade.

In other words, TIPS are abnormally cheap today relative to long-term averages; they’re also cheap if inflation surprises to the upside in the near future; and they’re cheap given our expectations for higher long-term inflation over the next decade.

The investment strategy

The authors suggest that investors should increase allocations to inflation protection.

In our analysis, a 10% allocation to inflation protection—for example, shifting from a typical 60/40 portfolio to a 60/30/10 allocation—may meaningfully improve risk-adjusted potential return under the new inflation regime.

Will that shift reduce investment returns? The authors theorize that it won’t and in fact could enhance returns. They suggest concentrating on shorter average duration to reduce interest-rate risk while retaining inflation protection. They conclude:

In our view, the right active inflation strategy should help investors beat inflation without sacrificing return. Between the low price of getting inflation protection today and the high cost of not having such insurance tomorrow, we believe the time is right to beat the inflationary tide.

The authors, unfortunately, then revert to “global investment firm” advice by suggesting backing up the TIPS holdings with high-yield bonds and emerging market debt. I am not a fan of that advice. Keep your bond allocation in safe investments and take risk elsewhere.

Thoughts

The AllianceBernstein authors raised an interesting point about real yields currently matching or potentially exceeding future GDP growth, which makes TIPS look like an under-priced investment. At the same time, investor interest is waning.

“Investors have been selling inflation protection in the mistaken belief that it’s no longer needed,” Rivers and Zhou wrote. Total net assets in this category have declined in each quarter from mid-2022 through March. In an interview with Barrons, Rivers noted that investors shouldn’t try to time inflation protection. From that article:

By buying TIPS “you’re getting a real yield of 2% plus any inflation accretion,” says Serena Zhou, portfolio manager for Fixed Income US Multi-Sector at AllianceBernstein. “If there are any unexpected inflation hikes, you are immunized from those spikes.”

Although my personal portfolio has only a 35% allocation to stocks, I have tried to achieve a 15% asset allocation in inflation protection. So my target would be more like 35% in stocks, 50% in bonds, CDs & cash, and 15% in I Bonds and individual TIPS held to maturity.

Over most of the past 13 years, attempting to build an inflation-protected allocation has been frustrating, with real yields often well below zero. That made I Bonds look super attractive with a fixed rate of only 0.0%. Today, the situation is reversed. Real yields are attractive. They could go higher, but today’s real yields are historically attractive.

My allocation is an outlier. For most people approaching or in retirement, this 60 / 30 / 10 recommendation from AllianceBernstein passes the “common sense” test. Placing 10% of your portfolio in TIPS and I Bonds is a quality recommendation for the cautious investor.

• Now is an ideal time to build a TIPS ladder

• Confused by TIPS? Read my Q&A on TIPS

• TIPS in depth: Understand the language

• TIPS on the secondary market: Things to consider

• Upcoming schedule of TIPS auctions

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Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear.Please stay on topic and avoid political tirades.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

Posted in Cash alternatives, Investing in TIPS, Retirement | Tagged bonds, economy, interest-rates, investing, personal-finance, Treasury investments | 42 Comments

iShares launches its 2034 target-date TIPS ETF

Posted on May 30, 2024 by Tipswatch

By David Enna, Tipswatch.com

As I predicted might happen in a December article on this topic, Blackrock’s iShares division last week launched a unique ETF holding just one bond: CUSIP 91282CJY8, a 10-year TIPS that matures in January 2034.

The ticker is IBIK and the technical name is “iShares iBonds Oct 2034 Term TIPS ETF.” See the fact sheet here and download the prospectus here.

I’m not a fan of Blackrock using the term iBonds in the fund name, since this can easily cause confusion with U.S. Series I Savings Bonds, usually called I Bonds. But I am sure the Treasury won’t be filing a trademark lawsuit.

IBIK joins a collection of these defined-maturity, single-year TIPS funds, which begin maturing in October 2024 and now run through 2034 with the addition of IBIK.

As you can see, the iShares ETFs are extremely small funds, especially compared to giants like Schwab’s U.S. TIPS (SCHP) and Vanguard’s Short-Term TIPS (VTIP). The tiny daily volume numbers would seem to indicate that purchases of these funds would create a bid-ask spread. For IBIJ, for example, Blackrock sets the predicted premium/discount at 0.20%.

Later this year, IBIK will add a second 10-year TIPS, the new one set to be originated in a July 18 auction. And then in 2029 it will add two more, the two 5-year TIPS to be issued that year and maturing in 2034.

Analysis

Reminder: These funds are designed to be held to maturity and the asset value will rise and fall with market trends through maturity, just like any other bond fund.

Because the expense ratio is just 0.1%, I really have no problem with using these funds as an alternative to buying individual TIPS. You could quickly build out a ladder through 2034 in 15 to 30 minutes, assuming the small daily volume doesn’t create issues.

In addition, the limited span of maturities means these ETFs aren’t the total solution for building an inflation-protected ladder of investments to cover 20 to 30 years.

iShares says these ETFs are designed to mature like a bond, trade like a stock. It says: “Combine the defined maturity and regular income distribution characteristics of a bond with the transparency and tradability of a stock.”

As for investment objectives, iShares notes the ETFs could be used to achieve multiple objectives. “Use to seek inflation protection with U.S. TIPS, build a bond ladder, and manage interest rate risk.”

Is there a required minimum investment?

No. The minimum investment would be the cost of one share (around $24.78 for IBIK) plus any possible brokerage commission. There are no limits on redemptions. iShares notes there can be a bid/ask spread on purchases and sales. That seems especially likely for an ETF that trades at such a low volume. The iShares prospectus notes:

When the Fund’s size is small, the Fund may experience low trading
volume and wide bid/ask spreads. In addition, the Fund may face the risk of being delisted if the Fund does not meet certain conditions of the listing exchange.

Traders in individual TIPS face these same bid-ask issues and at times can have trouble buying or selling TIPS in small numbers. This new ETF resolves the small-lot issue, at least. You can buy as little as one share.

Income and inflation accrual distributions

One of the advantages of owning a TIPS to maturity is that inflation accruals continue to build over time, increasing the amount of principal and also increasing the semi-annual coupon payment as the principal increases. An individual TIPS gets the benefit of compounding, even though the coupon is distributed twice a year.

But one of the disadvantages of a TIPS is that if held in a taxable account, those inflation accruals are subject to “phantom” federal income taxes in the current year, even though they are not paid out. Plus, if your account is at TreasuryDirect, you will face the “dreaded 1099-OID,” the cryptic form reporting your taxable accruals.

The plus. These defined-maturity ETFs “fix” the OID issue because inflation accruals will be paid out in the current year, along with the coupon interest. (This is the same way traditional TIPS funds work). That distribution makes these iShares TIPS ETFs more attractive for holding in a taxable account, because it eliminates the phantom income problem.

I assume this also means your broker will provide a single 1099-DIV tax form covering both coupon payments and inflation accruals.

The minus. Distributing the inflation accruals in the current year means that at maturity you will be receiving only the original par value and final coupon payment, since all the inflation accruals would have been distributed.

So to get the full benefits of compounding and true inflation protection you would need to reinvest all inflation-accrual distributions back into these TIPS ETFs or another similar product. That could be a problem because of the very low volume. For example, Vanguard says this on reinvestments in general: “A security’s distributions will not be reinvested if the security has a low average daily trading volume.”

For example, financial author Allan Roth ran into a low-volume problem while building his ladder of these defined maturity ETFs:

I thought it would be a piece of cake to buy these, but I was wrong—at least on two of them. Using the Fidelity retail website, all went through except two. For IBIC and IBIF, I got error notifications that the share quantity I entered was greater than the maximum allowed.

How could buying fewer than 25 shares for about $900 be too high? I followed up with Fidelity and eventually found out I was violating Market Access Rules. Fidelity explained that the quantity I was buying was too high relative to the average volume over the past 90 days. They were eventually able to solve it for me, but I couldn’t buy the exact dollar amount I wanted.

I suppose my best test-case solution would be to buy one of these funds in a Vanguard account and see if dividends will get reinvested. If anyone has experience with these, post your findings in the comments section.

Final thoughts

Will I be investing in this new ETF, IBIK? No, because I have already purchased CUSIP 91282CJY8 as part of my TIPS ladder, filling the 2034 rung. But I can see the appeal for investors looking for a simpler way to invest in TIPS, especially in a taxable account.

The expense ratio of 0.1% is very good, especially if you can make your trades commission-free. But I do warn against using these ETFs in an assets-under-management account, which could wipe out 1% to 2% of your annual earnings.

One other issue is the fact that these funds don’t offer true inflation protection over the long term, since they pay out the inflation accruals in the current year. That is great for people seeking cash flow. But an investor seeking inflation protection would need to figure out a way to reinvest distributions.

• Now is an ideal time to build a TIPS ladder

• Confused by TIPS? Read my Q&A on TIPS

• TIPS in depth: Understand the language

• TIPS on the secondary market: Things to consider

• Upcoming schedule of TIPS auctions

* * *

Posted in Cash alternatives, Inflation, Investing in TIPS, Retirement, TreasuryDirect | 21 Comments

Traveling in the endemic era

Posted on May 25, 2024 by Tipswatch

At times, it is not fun.

By David Enna, Tipswatch.com

“COVID is just a cold.”

This is how our Overseas Adventure Travel tour leader explained Europe’s (and most of the world’s) new attitude toward COVID-19. And it is a milestone in world travel, marking a dramatic change toward this now-endemic malady.

The theory is: Most people have been vaccinated. Many people have already had a bout or two with COVID. For most people, symptoms are cold-like — producing coughs, some aches and possibly a fever. Nothing too serious.

Face masks are now optional in almost all situations.

Travel policies vary from country to country, but in almost all European countries there is no need to prove you are vaccinated, wearing face masks is optional, testing for COVID is optional even if you have symptoms, and isolating is optional even if you do test positive. The European Centre for Disease Prevention and Control advises:

Travelers who develop any symptoms compatible with COVID-19 during or after travel should self-isolate and seek medical advice and test for SARS-CoV-2 to exclude a diagnosis of COVID-19.

Note the word “should.” This is not a requirement. The world is eager to bring back the flow of travelers and is transitioning to a “don’t ask / don’t tell” policy on COVID.

That is a massive change from the situation two years ago. I’ve been thinking back on our travel experiences since 2020 and realized how much things have transitioned as our fear of COVID lessens.

February 2020. During the very early days of COVID (when the U.S. probably had fewer than 100 reported cases), we traveled by boat up the Nile to Cairo. About halfway through the trip, a doctor suddenly appeared on board and hand-sanitizing stepped up. One of our travel friends was having difficulty breathing. We later learned that another Nile cruise ship — at the same ports at the same time with American travelers — had a huge outbreak of 70 cases.

We couldn’t travel overseas again for two years. But then we took off with a vengeance:

April 2022. We were with a group of 15 travelers in Sicily. To travel then you needed to 1) prove you had been vaccinated, 2) take a verified COVID test before departing and 3) take a verified COVID test before returning home. No one in our group had any symptoms of COVID. At the time, if our tour leader tested positive, he would have been banned from leading tours for one month.

May 2022. We traveled to the Czech Republic with an extension to Romania. Because of the combination of COVID and the outbreak of war in Ukraine, the main portion of the trip had only six travelers and the Romania portion, four. All the same rules applied. I can remember feeling very relieved when we tested negative for COVID in Bucharest so we could return home. No one had any symptoms of COVID.

Since June 2022, people traveling by air no longer need to provide a negative COVID test in order to enter the United States.

August 2022. This was a combination land-cruise ship experience on Viking. During the land portion (Fairbanks to Anchorage) we traveled by bus with 37 passengers. A few days in, I noticed a lot of people coughing (harshly) around us. My wife and I were wearing face masks on the bus, but many people weren’t.

To board the 900-passenger ship, you had to first test negative for COVID. Of the 37 people on our bus, 13 tested positive, including a friend we were traveling with. The 13 positive cases were sent to a hotel room and flew home the next day. No isolation was required (which wasn’t true in Canada at the time). At this point I realized that when you fly on a plane, you may be sitting next to a person with a known case of COVID.

My wife and I and our remaining friend (a doctor) boarded the Viking ship and took off. Within a couple days, we all tested positive for COVID, the first time for all of us. Symptoms were minor for us, but a bit worse for our friend. We all had come prepared with prescriptions of Paxlovid, which we began taking and isolating as much as possible. Within two days, my wife and I tested negative.

December 2022. We traveled with Overseas Adventure to Costa Rica. Travel rules had greatly eased by this point. Unfortunately, near the end of the trip, one of our travel group did get COVID and had to isolate for the remainder. So at this time, travel companies were still enforcing a five-day isolation period. The ailing person, however, flew home with the rest of us.

September 2023: We traveled in northern Greece, Albania and North Macedonia with a group of 16 that included 6 other family members. Midway through the trip, one of the cousins got COVID and he and his wife had to isolate for five days and then rejoined the trip, still wearing face masks and isolating at meals. Their rejoining caused almost-heated complaints from a couple of other travelers. But that was the policy, and the travel leader held to it.

And then … May 2024

We just returned from a 16-day trip through northern Spain and northern Portugal.

We did only the main portion of the trip, shown in center map.

As I noted earlier, European travel in 2024 is mostly “don’t ask / don’t tell” when it comes to COVID. On our trip, with 16 travelers, two arrived with active hacking coughs. By the end of the trip, that number grew to maybe 12. Face masks were not required, but my wife and I often wore them while on cross-country bus trips. Some others didn’t.

A few days before the end, my wife and I tested positive for COVID and so did at least six other people. But no testing was required and a couple travelers told us they saw no need to test <cough, cough, it’s just allergies>. I honestly think a dozen people ended up with COVID, and at least one person had more serious symptoms.

Everyone — COVID or not — flew home on the same day.

For me, the symptoms were minor — a very mild fever and a bit of congestion. My wife had a bad cough that continued for a week. We again had prepared with Paxlovid, which we began taking just before flying home. We are fine.

Final thoughts

This isn’t a travel blog, but I think this is valuable information for people who are planning overseas travel. At this point, the risks COVID presents to a vaccinated and healthy population are fairly minor … yes, more like a cold. But the risks remain.

Honestly, COVID has sapped some of the fun out of traveling. It’s not fun to travel by bus, surrounded by coughing people. It’s not fun to be constantly swapping face masks on and off and struggling to talk to people who hear only muffles.

On the other hand, this is a world we want to see and experience. So we will keep traveling. Advice:

Keep a helpful, positive spirit. If you know you are ailing, take steps to protect your fellow passengers.

Prepare for your travels by stocking up on COVID test kits and quality face masks. You may need neither, if you are lucky.

At least once a year, get a COVID vaccine booster. My most recent shot was Dec. 7, 2023. But we met a couple on this trip who were vaccinated two weeks before leaving and the husband got COVID (minor case).

Wear your face mask through the airport on your departure day and until everyone is boarded, ready for take off. That’s a pain, I know, but you do not want to get sick as you are leaving for this adventure.

If you are traveling by bus or car with people who are coughing, put on your face mask. If you are about to enter a very crowded, tight-space religious shrine …. er … skip it. Enjoy the outdoors.

If you can get a prescription to Paxlovid before you leave, do it. (Some doctors will do this; others won’t.) My doctor warned that it can have harsh side effects, but for me the only nasty effect is a lousy taste in my mouth, which remains today after my last dose Friday night.

Also, if comfort is a concern, consider traveling by river boat or a smaller cruise liner, which offer much better options for isolation and relaxation. The trade-off is losing some on-the-ground history and experiences. (There is no way I would take a 3,000-passenger cruise, however.)

Share this advice with anyone you know who is planning a trip overseas.

Happy holiday weekend, everyone.

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Posted in Retirement | Tagged COVID, Europe, Plaxovid, Portugal, Spain, World travel | 42 Comments

10-year TIPS reopening auction gets real yield of 2.184%, highest since 2009

Posted on May 23, 2024 by Tipswatch

By David Enna, Tipswatch.com

Today’s 10-year reopening of CUSIP 91282CJY8 — a 9-year, 8-month Treasury Inflation-Protected Security — generated a surprisingly high real yield to maturity of 2.184%, the highest for this term at auction since January 2009.

The auction apparently drew weak demand, with a sub-par bid-to-cover ratio of 2.33. The “when-issued” auction prediction, released just before the close at 1 p.m. EDT, was 2.16%. Investors were not snapping this one up, and that meant a higher real yield than expected.

This TIPS trades on the secondary market, and around 8 a.m. today it was trading with a real yield to maturity of 2.08%. That secondary-market yield climbed to 2.15% just before the auction’s close.

Definition: A TIPS is an investment that pays a coupon rate well below that of other Treasury investments of the same term. But with a TIPS, the principal balance adjusts each month (usually up, but sometimes down) to match the current U.S. inflation rate. So, the “real yield to maturity” of a TIPS indicates how much an investor will earn above inflation each year until maturity.

For today’s investors, the weak demand meant that this TIPS will outperform official U.S. inflation by 2.184% over the next 9 years, 8 months. We haven’t seen an auctioned yield that high for this term since January 2009, when a 10-year originating auction got a real yield of 2.245%.

Here is the trend in market 10-year real yields over the last 15 years, showing the dramatic round-trip to yields surpassing 2.0%:

Pricing

CUSIP 91282CJY8 carries a coupon rate of 1.75% that was set by the January originating auction. Investors got an unadjusted price of 96.249477, which reflects the spread between the auctioned real yield and the coupon rate. In addition, this TIPS will carry an inflation index ratio of 1.01586 on the settlement date of May 31.

With this information, we can calculate the investment cost of purchasing $10,000 par of this TIPS at today’s auction:

Par value of investment: $10,000
Inflation index at settlement date: 1.01586
Accrued principal on settlement date: $10,158.60
Cost of investment: $10,158.60 x 0.96249477 = $9,777.60
+ accrued interest of $66.91

In summary, an investor purchasing $10,000 par at this auction paid $9,777.60 for $10,158.60 of principal and will receive accruals matching inflation for the next 9 years, 8 months, plus an annual coupon rate of 1.75% on accrued principal.

Inflation breakeven rate

With the nominal 10-year Treasury note trading at 4.48% at the auction’s close, this TIPS gets an inflation breakeven rate of 2.30%, a bit lower than expected earlier today. It is significant to note that while the TIPS yield rose about 3 basis points at the auction’s close, the 10-year Treasury note held steady at 4.48%.

The breakeven rate is an indicator of investor expectations of inflation, but should not be considered an accurate predictor of future inflation.

Here is the trend in the 10-year inflation breakeven rate over the last 15 years, showing that today’s rate remains in the higher range, but well below the highs of early 2022.

Thoughts

I didn’t get a lot of feedback on my preview article for this auction, so I suspect there wasn’t a lot of reader interest. But the result was quite good for investors. Keep in mind that just five months ago, this TIPS originated with a real yield to maturity of 1.810%, 37 basis points below today’s result. That’s a big move.

From today’s Reuters report:

The Treasury’s $16 billion auction of 10-year Treasury Inflation-Protected Securities (TIPS) was poorly-received, suggesting investors expect price pressures will decline in the coming years. The high yield was 2.184%, higher than the expected rate at the bid deadline, which meant that investors demanded a premium to take down the note.

The bid-to-cover ratio, a gauge of demand, was 2.33, slightly lower than the previous auction’s 2.35, and the 2.40 average.

Were you an investor? What was your reaction?

Treasury will be auctioning a new 10-year TIPS on July 18. It will be interesting to watch how conditions change in the next two months.

Today’s auction closes out the history of CUSIP 91282CJY8, a TIPS that gave investors a solid first option for filling the 2034 rung of their investment ladders.

• Now is an ideal time to build a TIPS ladder

• Confused by TIPS? Read my Q&A on TIPS

• TIPS in depth: Understand the language

• TIPS on the secondary market: Things to consider

• Upcoming schedule of TIPS auctions

* * *

Posted in Inflation, Investing in TIPS, Retirement | Tagged bonds, finance, inflation, investing, real-estate | 29 Comments

This week’s 10-year TIPS reopening auction looks attractive

Posted on May 19, 2024 by Tipswatch

By David Enna, Tipswatch.com

Real yields have had a bumpy ride over the last several weeks, but as things settle down, it looks like this week’s reopening auction of a 10-year Treasury Inflation-Protected Security could be a promising investment.

This is CUSIP 91282CJY8, and the auction will create a 9-year, 8-month TIPS. Here is the history of that TIPS, which also trades on the secondary market:

Jan. 18, 2024: The originating auction generated a real yield to maturity of 1.810% and set the coupon rate at 1.75%. The unadjusted price was 99.454975, reflecting the discount investors received because of the lower coupon rate.
March 21, 2024: The first reopening auction got a real yield to maturity of 1.932% and the unadjusted price for investors fell to 98.380142.
May 17, 2024: As I am writing this on Friday at 12:20 p.m. EDT, this TIPS is trading on the secondary market with a real yield of 2.09% and a price of 97.07.

So, as I noted, as we head toward Thursday’s auction conditions are looking promising. But there is one problem: Real yields have actually been falling in recent weeks, with the 10-year dropping from its 2024 high of 2.28% on April 30 to 2.07% at Thursday’s market close.

That 21-basis-point drop was triggered by a “fairly” positive inflation report for April, which for the first time in three months matched investor expectations. Real yields initially dipped and then rebounded a bit after that report.

Here is the trend in the 10-year real yield since January 2023, showing that yields remain relatively attractive despite the recent dip, but also well below the highs of October 2023:

Definition: A TIPS is an investment that pays a coupon rate well below that of other Treasury investments of the same term. But with a TIPS, the principal balance adjusts each month (usually up, but sometimes down) to match the current U.S. inflation rate. So, the “real yield to maturity” of a TIPS indicates how much an investor will earn above inflation each year until maturity.

Pricing

CUSIP 91282CJY8 is available to purchase at any time on the secondary market, so there is no compelling reason to wait until Thursday’s auction to pull the trigger on an investment.

The advantage of buying at auction, especially through TreasuryDirect, is that even small-lot purchases will get the auction’s high yield. The advantage of the secondary market is that you can see exactly the price and real yield you will be receiving. The negative is that you may face a small bid-ask spread. Most of the time, it doesn’t make a huge difference, but if you see a real yield you like, know that you can probably get it on the secondary market without dealing with the auction’s uncertainty.

As of Friday afternoon, this is how an auction purchase of $10,000 par of CUSIP 91282CJY8 would look (realize that conditions will change before Thursday’s auction):

Par amount: $10,000.
Inflation index on settlement date of May 31: 1.01586
Principal purchased: $10,158.60.
Price: 97.07
Cost of investment: $9,860.95.
+ about $66.91 of accrued interest.

In this scenario, the investor would be paying $9,860.95 for $10,158.60 of principal and then will earn a coupon rate of 1.75% and principal accruals matching inflation for 9 years, 8 months.

Inflation breakeven rate

With a 10-year nominal Treasury note yielding 4.41% on Friday afternoon, this TIPS currently has an inflation breakeven rate of 2.32%, which is high by historical standards but seems about right in today’s elevated inflationary environment. A breakeven rate of 2.32% means that this TIPS would outperform the nominal Treasury if inflation averages more that 2.32% over 9 years, 8 months.

This chart shows the rather wild track of the 10-year inflation breakeven rate since January 2023:

Thoughts (from Portugal)

I am writing this Friday afternoon in Lamego, Portugal. It has been a beautiful day in the Douro Valley, with great food, wine and of course … port tastings. The people are friendly and the prices are at times amazingly cheap. I bought an excellent bottle of tawny port today at a vineyard for 8 Euros. “This price is ridiculous,” I said. The clerk said, “Everybody says that.”

Back to the TIPS …

I consider any real yield above 2.0% to be attractive, at least by standards of the last 15 years. Of course, real yields could climb higher, as they did in October 2023, or even dramatically higher if the Federal Reserve changes course toward higher rates. We can’t be sure, but collecting 2.0% above inflation is a positive thing, in my opinion.

Sanctuary of Our Lady of Remédios in Lamego, Portugal.

I won’t be a buyer at Thursday’s auction. Why? Because I already purchased this TIPS at the originating auction (real yield of 1.810%) in January and then again on April 4 on the secondary market (real yield of 2.043%). So I have now completed the 2034 tier of my TIPS ladder.

Thursday’s result could get a better real yield than either of my purchases, so … as I said … this auction remains attractive.

The TIPS auction closes Thursday at 1 p.m. EDT. Non-competitive bids at TreasuryDirect must be placed by noon Thursday. If you are putting an order in through a brokerage, make sure to place your order Wednesday or very early Thursday, because brokers cut off auction orders before the noon deadline.

You can check the current real yield for this TIPS on Bloomberg’s U.S. Yields page.

I should be back in the United States by Thursday, and I will be posting the auction results soon after the close. Here is a history of auction results for this term over the last 9 years: