Let’s check in on the I Bond’s next fixed rate

Posted on February 26, 2024 by Tipswatch

By David Enna, Tipswatch.com

Earlier this year, I think most I Bond investors were assuming that the I Bond’s next fixed rate would end up being lower than the current 1.30%, the highest fixed rate since November 2006. But things have changed.

I did a quick analysis of average real yields for 5- and 10-year TIPS from Nov. 1, 2023 — just after the last rate reset — to Friday’s close. After years of trying prediction formulas, I have settled on “average daily real yield” over the entire six-month rate-setting period as the best predictor of the Treasury’s future decision. But of course, it is not perfect.

My findings: At this point, I would guess the Treasury will hold the I Bond’s fixed rate at 1.30% at the May 1 reset, based on a ratio of 0.65 applied to the average daily real yield, with the result rounded to the 1/10th decimal point.

On Oct. 27, 2023, I posted a prediction on the I Bond’s Nov. 1 reset, showing that the 10-year real yield had averaged 1.78% from May to Oct. 26, 2023. If you applied a ratio of 0.65 to that number, you got a fixed rate projection of 1.20%. The Treasury decided on 1.30%.

In that projection, I ignored the 5-year average real yield, which was substantially higher at 1.99% from May to October 2023. Applying the 0.65 ratio to 1.99% gets you to 1.29%, which rounds to a 1.30 fixed rate. So it is clear that the 5-year real yield also matters.

Qualifications

More than two months remain before the Treasury’s fixed-rate decision, so things are likely to change, either up or down. It’s too early to say, but right now it does look like the I Bond’s fixed rate could hold steady at 1.3%, or even go higher if real yields continue climbing.

Want to do this calculation?

The process is simple, using the Treasury’s Real Yield Curves page. For the November 2023 to current day period, you will need to download two .csv files from the site. This .csv file is a simple spreadsheet you can open with Excel.

  • First, use the selection box to select 2023 and click Apply. You will see a list of all real yields for the entire year. You will also see “Download CSV” as a link. Click on that and you will immediately download a .csv file with all real yield data for 2023. This link should work.
  • Next, do the same thing to get to the 2024 listing and download that .csv file. This link should work for that.
  • Find the files in your download folder, or wherever you saved them.
  • Open the files and in the 2023 version, eliminate all data before Nov. 1. You can also delete the columns for 7-, 20- and 30-year TIPS, if you like. Then open the 2024 file and copy the date column, along with the 5- and 10-year real yield columns.
  • Paste the 2024 data onto the end of the 2023 data and you now have a list of all 5- and 10-year real yields for the current period.
  • Use Excel’s “sum” function to add each column. Then divide the results by the number of rows with data and you have your average daily real yield.
  • Multiply each average real yield by 0.65 to get an estimate of the potential I Bond fixed rate, at that point in time. Reminder: This is only an estimate.

What this means

At this point, it still looks like the I Bond’s next variable rate could come in around 2.0%, lower than the current 3.39%. If that is true, and it looks like the I Bond’s fixed rate will hold at 1.3%, then investing in April would make sense, to lock in the current composite rate of 5.27% for a full six months.

But again, things can change. I’d continue advising holding off on I Bond investments until April 10, when the March inflation report is released and the I Bond’s new variable rate will be set. If it is going to be higher than the current 3.94%, then investing in May might be the best choice.

I’ll be updating this I Bond fixed rate projection in mid-April with more complete numbers.

• I Bond buying guide for 2024: Be patient

• Confused by I Bonds? Read my Q&A on I Bonds

• Let’s ‘try’ to clarify how an I Bond’s interest is calculated

• Inflation and I Bonds: Track the variable rate changes

• I Bonds: Here’s a simple way to track current value

• I Bond Manifesto: How this investment can work as an emergency fund

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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, I Bond, Inflation, TreasuryDirect | 15 Comments

30-year TIPS auction gets real yield of 2.20%, highest in 14 years

Posted on February 22, 2024 by Tipswatch

By David Enna, Tipswatch.com

The Treasury’s auction of a new 30-year Treasury Inflation-Protected Security — CUSIP 912810TY4 — generated a real yield to maturity of 2.20%, the highest for this term at auction since February 2010. The coupon rate for this TIPS was set at 2.125%, matching a 14-year high.

I consider this a solid result. Just before the auction close, a similar TIPS was trading on the secondary market with a real yield of 2.19%, so the auction result was very close to market. The bid-to-cover ratio was a solid 2.48.

When looking at this result in historical terms, it is worth noting that the Treasury stopped issuing 30-year TIPS from October 2001 to February 2010. So today’s result matches the highest yield and coupon rate in the era since February 2010.

Pricing

Because the coupon rate was set slightly lower than the auctioned real yield to maturity, investors got this TIPS at a slight discount, with an unadjusted price of 98.359923. In addition, the TIPS will have an index ratio of 0.99952 on the settlement date of February 29. So this is how a $10,000 investment in this TIPS would be priced:

  • Par value: $10,0000
  • Adjusted principal ($10,000 x 0.99952) = $9995.20
  • Cost of investment ($9,995.20 x 0.98359923) = $9,831.27
  • + Accrued interest = $8.17

This is a pretty simple auction result to understand. The investor got $10,000 in par value, but paid $9,831.27 for $9,995.20 in principal as of Feb. 29. The accrued interest will be returned at the first coupon payment on August 15.

Inflation breakeven rate

With the nominal 30-year Treasury bond trading at 4.47% just before the auction result, this TIPS gets an inflation breakeven rate of 2.27%, which looks fine. This means the TIPS will outperform the nominal Treasury if inflation averages more than 2.27% over the next 30 years.

Here is a history of recent TIPS auctions of this term:

• 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 Investing in TIPS | Tagged , , , , | 9 Comments

For the right investor, this week’s 30-year TIPS auction looks attractive

Posted on February 18, 2024 by Tipswatch

Caution: Consider carefully the long term and high volatility.

By David Enna, Tipswatch.com

The U.S. Treasury on Thursday will offer at auction $9 billion in a new 30-year Treasury Inflation-Protected Security. For an investor who can handle the long term and high volatility of a 30-year TIPS, this auction deserves a careful look.

  • The Treasury’s real yield estimate for a 30-year TIPS closed Friday at 2.17%, up 26 basis points since February 1. That’s a strong move higher, triggered by elevated inflation fears in the wake of the higher-than-expected January inflation report.
  • If the yield holds at 2.17% at Thursday’s auction, it would be the highest auctioned real yield for any 29- to 30-year TIPS since February 2011.
  • A yield that high would set its coupon rate at 2.125%, matching the highest coupon rate for any TIPS auction of this term since February 2010.

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.

So in this case, a real yield to maturity of 2.17% means this TIPS would out-perform U.S. inflation by 2.17% over the next 30 years. That is historically attractive. Getting a coupon rate of over 2.0% is also attractive, in my opinion. It offers a buffer of protection during deflationary periods, plus generates current income that should easily cover the “phantom tax” problem for TIPS in a taxable account.

Here is the trend in the 30-year real yield over the last four years, showing real yields have backed off the highs of late October 2023, but remain historically strong. Obviously, yields could continue rising. Impossible to predict.

Click on image for larger version.

There are dangers

There are only two types of investors who should seriously consider buying this TIPS: 1) An investor who is committed to holding to maturity, no matter the ups or downs of market pricing, as part of a structured 30-year plan to set aside inflation-protected cash for the future, and 2) A speculator who believes this TIPS can be sold at a profit in the near- to mid-term future.

A 30-year TIPS is highly volatile. In 2023, the February 30-year TIPS auction generated a real yield of 1.55%, the highest in 12 years. The coupon rate was set at 1.50%, also a 12-year high. It was an attractive result, at that moment. But … with the 30-year real yield currently at 2.17%, that TIPS (CUSIP 912810TP3) is now trading with a price of 85.96, meaning it has lost about 14% of its value in one year.

The investor in that TIPS who intends to hold to maturity will do fine collecting 1.55% above inflation over 30 years. But an investor who can’t stomach that sort of volatility probably isn’t happy. It takes an iron will to invest in a 30-year TIPS and then hold to maturity.

Pricing

This TIPS will carry an inflation index of 0.99952 on the settlement date of February 29. That means any investment at this auction should result in a cost close to the par value. In other words, an investor placing an order for $10,000 in par value should end up paying slightly less than $10,000. But a small amount of accrued interest will raise the cost slightly.

The par value of a TIPS — $10,000 in the example above — is guaranteed to be returned at maturity if severe deflation sets in. For a 30-year TIPS, this really isn’t an issue. But buying a new TIPS at par value is still “nice,” in my opinion.

Inflation breakeven rate

With the nominal 30-year bond closing Friday at 4.45%, this new TIPS currently would get an inflation breakeven rate of about 2.28%, slightly below the rates of the last two auctions of this term. This number seems reasonable. Inflation over the last 30-years, ending in January, has averaged 2.5%.

Here is the trend in the 30-year inflation breakeven rate over the last four years, showing the current rate is close to the typical rate seen since July 2022:

Final thoughts

I won’t be a buyer of this TIPS because its 30-year maturity doesn’t match my probable lifespan for holding to maturity. (My TIPS ladder extends to 2043, when I will be 90. Hope I make it.)

But the auction is intriguing because the real yield is attractive. For an investor who can conceivably hold this TIPS for 30 years, and can tolerate its high volatility, CUSIP 912810TY4 deserves a strong look.

This TIPS auction closes Thursday at 1 p.m. EST. 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.

I am writing this from Wellington, New Zealand, where I am 18 hours ahead of Eastern Standard Time. I plan on writing on the auction result after it closes on Thursday, but I can’t say when. The auction closes just at the start of a busy travel day, 7 am on Friday for me. Be patient, but you can check this page for the auction result after 1 p.m EST.

Meanwhile, here are auction results for the 29- to 30-year term over the last eight years:

• 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

* * *

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 Inflation, Investing in TIPS, TreasuryDirect | 24 Comments

U.S. inflation rose 0.3% in January, higher than expectations

Posted on February 13, 2024 by Tipswatch

By David Enna, Tipswatch.com

I am traveling today so this will be a brief post.

So … it looks like the Federal Reserve’s wariness on inflation has been justified, at least based on data from the January inflation report.

The Consumer Price Index for All Urban Consumers increased 0.3% in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.1%.

Both the monthly and annual numbers came in higher than expectations, and I had even heard discussions on CNBC of a possible “2-handle” for annual inflation coming out of this report. It didn’t happen. Core inflation also was higher than expectations, coming in a 0.4% for the month and 3.9% for the year.

Once again, the BLS pointed to shelter as a major driver of overall inflation, with shelter costs rising 0.6% in January and 6.0% for the year. Food-at-home prices also perked up at 0.4% for the month, after running at 0.2% for two consecutive months. Gasoline prices were down 3.3% in the month and 6.4% for the year.

The annual trend in U.S. inflation shows that core inflation seems to have stabilized at an annual rate right around 4.0%:

What this means for TIPS and I Bonds

Investors in Treasury Inflation-Protected Securities and U.S. Series I Savings Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust principal balances for TIPS and set future interest rates for I Bonds. For January, the BLS set the inflation index at 308.417, an increase of 0.54% over the December number.

For TIPS. The January report means that principal balances for all TIPS will rise 0.54% in March, after falling 0.20% in January and 0.10% in February. The Treasury hasn’t posted the new March inflation indexes for all TIPS as of yet. When it does, this link should work.

For I Bonds. The January inflation report is the fourth of a six-month string that will determine the I Bond’s new inflation-adjusted variable rate, to be reset on May 1 and eventually roll into effect for all I Bonds. In the October to January period, inflation has increased just 0.20%, which would translate — for now — to a variable rate of 0.40%, much lower than the current 3.94%. The next two months are likely to increase that number; I’d say 2.0% certainly looks possible.

Here are the data so far:

This is all the time I have this morning. I am off!

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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 Federal Reserve, I Bond, Inflation, Investing in TIPS, TreasuryDirect | Tagged , , , , | 9 Comments

My schedule … and what’s coming up

Posted on February 11, 2024 by Tipswatch

By David Enna, Tipswatch.com

Destination: Middle Earth.

If you have been reading this site for a long time, you know what this headline means: I will soon be traveling to some distant place with confusing timezone differences and potentially weak-to-zero internet.

It is so far, in fact, that I will depart on Day One and arrive on Day Three after crossing the international dateline. I will entirely miss Valentine’s Day. And I expect the jet lag to be severe. The trip will last more than three weeks and I won’t have a lot of time to follow financial news.

So expect some lag time, especially in approving comments or responding to questions. But I will try to post news when I can, including a preview of this month’s 30-year TIPS auction.

Tuesday, Feb. 13. The January inflation report will be issued at 8:30 am EST. Originally, this wasn’t going to be a schedule problem for me because my departing flight was leaving Tuesday afternoon. Things got shifted around and now I am leaving in the morning, so I won’t be able to post any news or analysis until a layover in Houston.

The forecast for January inflation is 0.2%, according to Barron’s. That is the seasonally adjusted number for all-items inflation, and — if accurate — looks tame enough to keep both the stock and bond markets happy.

I’d expect the non-seasonally adjusted number to come in higher. Last year, for example, official January 2023 inflation was 0.5%, while non-seasonally adjusted rose 0.8%. In January 2022, official inflation rose 0.6%, while non-seasonal was up 0.84%.

Why is this important? Because non-seasonally adjusted inflation will be used to set the new inflation-adjusted variable rate on U.S. Series I Savings Bonds. So far, three months into the 6-month rate-setting period, inflation has been negative, at -0.34%. So January non-seasonal inflation will need to come in at 0.34%, at least, just to get the number to zero.

All of this makes it highly likely that the I Bond in May will get a lower variable rate than the current 3.94%. Possibly much lower. But things can change.

Sunday, Feb. 18. In the morning, I will post a preview article on the 30-year TIPS auction set for Feb. 22. Although I won’t be a buyer (the term is too long for me) this could end up being attractive for the investor who can handle the long maturity date and high volatility.

As of Friday’s market close, the 30-year real yield stood at 2.13%, which I consider attractive. For perspective, here is the trend in the 30-year real yield over the last 14 years. Despite speculation that Treasury yields would plummet in 2024 as the Fed inched toward easing, long-term real yields have remained relatively high.

Click on image for larger version.

This chart is a reminder that the “window” for building a comprehensive TIPS ladder is still open. Real yields remain attractive across the maturity spectrum. Could they go higher? Sure. But I’d expect some “token” rate cuts coming from the Fed sometime this year, especially if inflation remains tame.

Thursday, Feb. 22. The 30-year TIPS auction will close at 1 p.m. EDT, which is 7 a.m. Friday in New Zealand. I’ll probably be at breakfast in Auckland and then embark on the day’s activities. I’ll get something posted, eventually. Don’t expect too much.

After that? Something crazy always happens when I travel, so sorry if I cause an international financial crisis. I might not even be aware it is happening. I’ll be back to the U.S. in time for the February inflation report, to be issued March 12.

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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 Federal Reserve, I Bond, Inflation, Investing in TIPS | 7 Comments