Treasury Inflation-Protected Securities

Federal Reserve launches a ‘sea change’ of uncertainty

Posted on December 14, 2023 by Tipswatch

By David Enna, Tipswatch.com

We’ve entered a new era. That’s what Bloomberg’s ever-thoughtful Tom Keene repeated over and over in Wednesday’s coverage of the Federal Reserve’s interest rate forecasts. “This is a sea change,” he said. “I have to emphasize how important this is.”

What exactly did the Fed do? It held the federal funds rate at the current level (target range of 5.25% – 5.50%) and signaled strongly that it is likely to cut short-term interest rates three times in 2024, beginning as early as March. This wasn’t unexpected, but the Fed was unusually firm in declaring that we’ve entered a new dovish era of interest rates, after nearly two years of unprecedented increases.

The Fed projections settled on 75-basis-points of rate cuts in 2024, but the stock and bond markets clearly anticipate something larger. Both markets soared Wednesday and into Thursday, with the Dow average hitting an all-time high and bond yields falling dramatically.

Significantly, however, the FOMC also reiterated its intention to continue lowering its massive balance sheet of U.S. Treasurys. It said:

In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.

This is an important tidbit of news, because it means that while the Fed will be easing on the short-end of the yield curve, it will continue tightening on the longer end by allowing Treasurys to mature and roll off the balance sheet. That is quantitative tightening, and it should support longer-term yields.

As a result, you should see a widening of the yield curve, with yields on shorter maturities falling, but rising or holding stable for longer maturities (or at least not falling as far). This was immediately evident in the way the Fed action rocked Treasury real yields:

I created this chart at about 9:10 am ET and 15 minutes later the 5-year real yield had fallen to 1.74% and the 10-year to 1.72%. There’s no way to say exactly how far this could go. But it is significant because the Treasury will be auctioning a reopened 5-year TIPS on Dec. 21 and then a new 10-year TIPS on Jan. 18, 2024. Both of those auctions could result in much lower real yields than we have seen in recent months.

The “sea change” nature of the Fed’s pronouncements can’t be underestimated. This morning, the U.S. dollar index is trading at 102.14, down about 2% since the Fed’s announcement at 2 p.m. Wednesday. A fall in the value of the dollar has an inflationary effect, especially on commodities. So it shouldn’t be a surprise that crude oil prices are up 3% this morning.

What this means for TIPS

I don’t think the Fed’s action is dire news, but it will mean lower real yields on near-future TIPS investments. We aren’t heading anywhere near the negative-real-yield fiascos of the recent past. And if the Fed continues lowering its balance sheet, the yield curve should steepen, making longer-term TIPS relatively more attractive.

The Fed must be fairly confident that inflation is indeed tamed, and it also must see some weakening in the U.S. economy. Both of those factors support lower interest rates. But if the Fed is wrong, inflation could surge again. That danger makes TIPS attractive, even if real yields decline.

One thing to celebrate: All the TIPS you currently hold rose in value yesterday as yields plummeted. The net asset value of the TIP ETF surged from $105.30 just after 1 p.m. Wednesday to $107.51 this morning, a gain of 2.1% in less than 24 hours. Of course, we are all buy-and-hold investors, right? Ignore the noise.

What this means for T-bills

Yesterday, the Treasury auctioned a 17-week T-bill that got an investment rate of 5.432%, up from 5.421% the week before. That could end up being the highest yield we will see at that term for quite awhile, but so far T-bill yields have been holding up relatively well.

The 3-month T-bill is yielding 5.36% this morning, down just 10 basis points from two days earlier. That indicates investors don’t see rate cuts happening within the next three months. Seems logical.

The 12-month T-bill is yielding 4.86%, down 27 basis points from two days ago. In this case, investors seem to be pricing in a partial year of rate cuts. Also “somewhat” logical.

And the 2-year Treasury note? It is yielding 4.37% this morning, down 34 basis points this morning. That seems attractive to me. But remember, the yield curve should grow steeper as the short-term yields fall. And also keep in mind that the market was already pricing in future rate cuts, ahead of the Fed announcement.

Final thoughts

Is inflation really tamed? That will be the key question. If you listened to Jerome Powell’s news conference, you didn’t hear that definitive statement and in fact he repeatedly stated that inflation remains a concern. But I think the Fed feels satisfied that it can gradually get to a “neutral” short term interest rate of about 3% without causing inflation to surge.

The Fed has been wrong before. But in this case I think it was time to begin very gradually easing short-term interest rates, while maintaining the commitment to lowering the Fed’s swollen balance sheet.

What are your thoughts? Do the lower real yields sidetrack your investment plans? Are short-term Treasurys and money-market funds starting to look less attractive? Will you make a move to stretch out duration? Post your ideas below.

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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, Federal Reserve, Inflation, Investing in TIPS, Treasury Bills | 27 Comments

U.S. inflation rose 0.1% in November, at bit higher than expected

Posted on December 12, 2023 by Tipswatch

TIPS principal balances will fall 0.2% in January, based on non-seasonally adjusted inflation.

By David Enna, Tipswatch.com

Costs of shelter continued rising in November, offsetting declines in gas prices, resulting in seasonally-adjusted all-items inflation of 0.1% for the month, the Bureau of Labor Statistics reported today.

The all-items number came in above expectations of 0.0%, but annual inflation of 3.1% matched the consensus. Core inflation, which removes food and energy, rose 0.3% in November and 4.0% for the year, matching expectations.

On the positive side, annual U.S. inflation dropped a notch to 3.1% for the year ending in November, down from 3.2% in October. That is the lowest annual inflation rate since June.

The BLS noted that the shelter index increased 0.4% in November, after rising 0.3% in October, and was the largest factor (about 70%) in the increase in core inflation. Shelter costs are up 6.5% year-over-year. This news is likely to set off protests that CPI shelter is a lagging indicator and doesn’t reflect current conditions. But … it is what it is. More from the report:

Food at home costs were up 0.1% for the month and 1.7% year-over year. U.S. consumers can appreciate these moderate numbers.
Gasoline prices fell 6.0% in November and are now down 8.9% year-over-year.
Costs of used cars and trucks increased 1.6% but are down 3.8% over the year.
Costs of new vehicles fell 0.1%.
Apparel costs fell 1.3%.
The medical care index rose 0.6% in November.
Costs of motor vehicle insurance rose 1.1% for the month and are up a shocking 19.2% year-over-year. (Be prepared when you get your next bill.)

Overall, I’d say this November inflation report came in about on target, with shelter costs again being the “suspicious” factor pushing inflation higher. Over the next 12 months, this trend is likely to reverse. The trend over the last year has been gradually-moderating inflation, but with core locking in at 4.0% with shelter as the major factor:

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 on TIPS and set future interest rates for I Bonds. For November, the BLS set the inflation index at 307.051, a decrease of 0.20% from the October number.

Remember that non-adjusted inflation tends to lag the official number toward the end of the year because of holiday-season discounting. So this deflationary number wasn’t a surprise, and you can expect to see another one for December before things turn around in January.

For TIPS. The November inflation index means that principal balances for all TIPS will decline 0.20% in January, after falling 0.04% in December. Here are the new January Inflation Indexes for all TIPS.

For I Bonds. The November inflation report is the second of a six-month string that will set the I Bond’s new variable rate, to be reset on May 1. So far, with four months to go, inflation has fallen 0.24% for this period. It’s too early to make any judgement about the new variable rate. We saw a similar pattern in November to December in 2022, but then non-seasonally adjusted inflation leaped higher in January 2023.

Here are the numbers so far:

View historical data on my Inflation and I Bonds page.

What this means for future interest rates

Although all-items inflation came in slightly higher than expectations in November, I don’t believe this will have any real effect on the Federal Reserve’s thinking on interest rates. The Fed is highly likely to continue, for now, to hold short-term interest rates in the current range of 5.25% to 5.50%.

In fact, I’d guess these current inflation numbers won’t play a deciding role in the Fed’s interest-rate decisions. More likely, the Fed will be watching employment trends. If the job market begins to sour, the Fed will begin lowering the federal funds rate.

From this morning’s Wall Street Journal report:

The Fed is on track to hold rates steady at its meeting Tuesday and Wednesday, and the latest inflation data won’t change that path. The latest reading is probably a bit firmer than the Fed would like to see to be confident that inflation is moving back quickly to its 2% goal, but it is unlikely to alter the Fed’s near-term policy stance because inflation has improved markedly this year.

Both the stock and bond markets seem confident that the Fed will begin easing next year, possibly by spring. That isn’t the message the Fed intends to send, but it could be true. The path forward, in my opinion, is going to be “choppy.”

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Posted in Federal Reserve, I Bond, Inflation, Investing in TIPS | 11 Comments

Real yields are sliding lower with talk of a ‘Fed pivot’

Posted on December 10, 2023 by Tipswatch

By David Enna, Tipswatch.com

You can’t watch CNBC for more than 10 minutes without hearing some analyst predict the Federal Reserve will begin cutting interest rates in March 2024 … or May … or certainly by June.

On the other hand, Fed officials have rigorously maintained that interest rates — while possibly not increasing again — will remain at current levels well into next year. This is what Fed Chair Jerome Powell said on December 1:

The FOMC is strongly committed to bringing inflation down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective.

It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so.

Then we got Friday’s jobs report, with employers adding 199,000 jobs last month, considered a sign the U.S. economy is not faltering. The unemployment rate fell to 3.7%, down from October’s 3.9%. Average hourly earnings were up 4% year-over-year, exceeding the current inflation rate of 3.2%.

My conclusion: 1) The Fed doesn’t need to raise short-term interest rates, and 2) The Fed doesn’t need to cut short-term interest rates, at least until data begin showing a slowing U.S. economy.

But the bond and stock markets don’t seem to agree, thanks to a short-term focus. Bond yields have been falling for the last 45 days. The S&P 500 is up 5.25% over the last month. Highly speculative investments like Bitcoin have been surging higher. Here is a “moderate” view from Dryden Pence, chief investment officer at Pence Capital Management, predicting just a “couple” rate cuts next year:

In this video, CNBC’s Mike Santoli attempts to debunk the idea that the surge in higher-risk assets has been caused by predictions of a Fed pivot. “To me, the stock market right now is not at this level because we are assuming we will get 100 to 150 basis points of cuts next year,” he says. “It’s because … we have a little more of a sustainable moment in the expansion.”

Nice theory, but if this were true, you’d see mid- to longer-term bond yields sustaining at high levels. Instead, they have been declining sharply. Expectations of lower interest rates are driving this market.

Next week’s inflation report, coming Tuesday at 8:30 a.m. ET, will probably give another boost to market optimism. The forecast for November all-items inflation is 0.0%, which should inch the annual rate closer to 3.0%. Core inflation, however, is expected to remain steady at 4% year over year.

Real yields are declining

We’ve just had a “Goldilocks” period of above-inflation yields nearing 2.5% across all maturities, beginning Sept. 19 and lasting until early October. But that ended last week, with both the 10-year and 20-year real yields dipping below 2.0% for two days, before bouncing back on Friday in the wake of the positive jobs report.

Investors looking to build a solid ladder of TIPS investments, stretching well into their retirement years, had a nice opportunity to fill that ladder, or add to it. I think we will probably see lower yields heading into 2024, but nothing is certain.

Remember, real yields holding around 2% remain attractive. That yield is likely to cover any taxes owed, meaning your investment will at least match, or more likely easily exceed, future inflation, even after taxes. For perspective, here is a chart showing 5-, 10- and 30-year real yields since January 2020, just before the massive pandemic-triggered Federal Reserve easing beginning in March 2020:

This is a strange-looking chart because the yield curve is now close to perfectly flat. For the future, I expect a wider spread, and that will probably mean the shorter-term yields will fall and longer-terms will rise, or at least not fall as far.

This weekend, a Barron’s commentary backs me up:

The better question is where rates will settle in the coming decade. The probable answer: below today’s target range of 5.25%-5.50%, but higher than many economists and policy makers expected a year or two ago, and far higher than the near-zero rates of the past 15 years.

And then there is the fact that budget deficits are going to soar well into the future, forcing ever-higher Treasury borrowing. From Barron’s, a rather scary projection:

What this means for I Bonds

If real yields continue falling, the I Bond’s current fixed rate of 1.3% is going to look more and more attractive. Since Nov. 1, both the the 5-year and 10-year TIPS yields have averaged about 2.2%, which at this point would equate (possibly) to an I Bond fixed rate of about 1.3% to 1.4%. But if real yields continue falling, we very well could see a lower I Bond fixed rate at the May 1 reset. And that could be combined with a lower variable rate if inflation continues sliding lower.

The great thing about I Bonds is that the 1.3% fixed rate is available for purchases through the end of April 2024. Investors who purchase any time before then can lock in the 1.3% fixed rate for the life of the I Bond, plus a composite rate of 5.27% for a full six months.

Several readers have mentioned recently that they are considering over-paying 2023 estimated taxes to get $5,000 in paper I Bonds in lieu of next year’s federal tax refund. Not a bad idea, if you like this strategy.

At this point in time, for an experienced investor, TIPS yielding 2% above inflation remain more attractive than an I Bond with a fixed rate of 1.3%. But the gap is narrowing, and I Bonds have many advantages over TIPS: flexible maturity, better deflation protection and deferred federal taxes.

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Posted in Federal Reserve, I Bond, Inflation, Investing in TIPS, Retirement, Savings Bond | 27 Comments

Let’s look at the new iShares Defined-Maturity TIPS ETFs

Posted on December 3, 2023 by Tipswatch

These new funds offer simplicity, but with some drawbacks.

By David Enna, Tipswatch.com

Back in late September, financial adviser/author Allan Roth sent me an email pointing out BlackRock’s new offering of 10 defined-maturity TIPS ETFs. Roth, who has been pushing for more useful TIPS ETFs, called this “a step in the right direction.”

I was traveling in Greece at the time and couldn’t take a careful look. But after a quick glance, I decided that yes, these ETFs looked reasonable both in theory and in cost. The expense ratios are only 0.10%.

But I had questions: Who is the target market for an ETF that will be holding only two to six bonds until maturity? Why not just buy and hold the individual TIPS? Would these ETFs provide tax-reporting benefits in a taxable account? Are these ETFs targeted at customers of assets-under-management financial advisers (which would dramatically increase the cost to investors)?

A few weeks later, Roth wrote an article for ETF.com on the BlackRock offerings, with the subhead: “Here is why I bought all 10 of them.” From the article:

I spoke with Karen Veraa, head of U.S. iShares Fixed Income Strategy at BlackRock, about these new ETFs. She confirmed that the purpose of the new ETFs is for the investor to buy and hold until maturity. She noted that buying the individual TIPS directly can be complex with large bid-ask spreads. She also said the tax reporting is simplified with annual 1099s issued. …

I like these ETFs and asked John Rekenthaler at Morningstar to give me his views. He responded: “I highly approve of these new funds.”

By the way, Allan Roth is not an assets-under-management financial adviser. He charges an hourly fee and would not benefit financially if his clients used these iShares ETFs.

A contrary view was offered by financial author and adviser Dr. William Bernstein on a recent “Bogleheads on Investing” podcast. Host Rick Ferri asked him about the new “bullet” iShares TIPS ETFs, and after praising TIPS as an investment, he said:

The bullet shares, unless I misunderstand them, don’t make a bit of sense to me. … Why would you buy one or two bonds that mature in any given year. … when you can buy the bond yourself for zero expense? That doesn’t make any sense.

Bernstein’s reaction (which I think is sound) set off a debate in the Bogleheads forum, with contributors weighing in on both sides.

Let’s take a look

The iShares suite of defined-maturity TIPS funds offers maturities for 2024 to 2033. In other words, you buy the ETF — probably intending to hold to maturity — and then after a defined period, it distributes all proceeds and closes down.

A few things to notice right away: 1) These are extremely small funds with only about $5 million in net assets, versus $19.7 billion for the giant TIP ETF, also from iShares. 2) The number of bonds in each fund is also tiny, ranging from 2 to 6. And 3) The average daily volume is minuscule, which could create bid/ask spread problems. The TIP ETF, by contrast, trades 2.8 million shares a day.

Why do the offerings end in October 2033? Because there are no TIPS maturing from years 2034 to 2039, and then from 2040 to 2053 only a single TIPS per year trades on the secondary market. It’s likely iShares will create a 2034 ETF next year, possibly at first holding only one TIPS (issued in January) and then a second one when a new 10-year TIPS is auctioned in July.

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. Roth notes:

Though these new ETFs don’t solve a 30-year safe withdrawal rate, they could be perfect for uses such as bridging the gap while delaying Social Security by building an eight-year ladder at age 62 and waiting to age 70 to begin distributions.

What is the investment objective?

Let’s look at one of these investments, IBIE, which has a target maturity date of Oct. 15, 2028. It holds six TIPS, the most of any of these defined-maturity funds.

This ETF was launched on Sept. 13, 2023, so it has very little performance history. At this point, Morningstar has no performance data on its IBIE page. The ETF launched with a price of $25.22 and now trades at about $25.29.

iShares says the ETF is 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 it 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 $25.29 for IBIE) 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.

However, even with the small volume for the IBIE ETF, iShares reports that the premium or discount to net asset value has been small, about 6 cents per share. And the median bid/ask spread has been just 0.08%.

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.

In the past, I have written about holding individual TIPS in a taxable account. I am actually OK with that, but after retirement I switched to using a traditional IRA, where money can be raised without tax consequences. See this: “Frightened by a phantom? TIPS are fine in a taxable account, until …“

The ETF 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 ETF 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. I am not confident it would be wise to try to create a reinvestment strategy for ETFs with extremely small average daily volumes. I expect that Vanguard, for one, would refuse to do those reinvestments automatically.

For example, 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.

Final thoughts: Simplicity is good

These defined-maturity ETFs look good, maybe not for me, but for other investors looking for a simpler way to invest in TIPS, especially in a taxable account. The iShares pitch is “matures like a bond, trades like a stock” and that is appealing.

In just an hour, an investor could conceivably build a “diversified” exposure to TIPS spanning 10 years, with maturities in each year. This isn’t the solution to building a long-term TIPS ladder to last through retirement, but could be used as a bridge to taking Social Security at age 70 or other specific needs lasting 10 years.

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.

Reinvesting is quite simple for traditional high-volume TIPS funds like TIP, SCHP or VTIP. But the very small volumes of these iShares funds could cause problems. iShares notes: “No dividend reinvestment service is provided by the Trust” and it suggests contacting your broker to see if it can be done on the secondary market.

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Posted in Investing in TIPS, Retirement, TreasuryDirect | 44 Comments

10-year TIPS reopening gets real yield of 2.180% to apparently weak demand

Posted on November 21, 2023 by Tipswatch

By David Enna, Tipswatch.com

The U.S. Treasury’s $15 billion offering of a reopened 10-year TIPS — CUSIP 91282CHP9 — generated a real yield to maturity of 2.180%, a bit higher than traders expected.

This 9-year, 8-month TIPS had been trading on the secondary market all morning with a real yield in the range of 2.13% to 2.15%. The “when-issued” prediction for the auction was 2.145%, well below the result. The bid-to-cover ratio was 2.32, indicating fairly weak demand.

But weak demand adds up to positive news for investors in this TIPS, who got a better yield at a lower price.

Pricing

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.

The coupon rate of CUSIP 91282CHP9 was set at 1.375% by the originating auction on July 20, 2023. Because the auctioned real yield was much higher at 2.180%, investors got this TIPS at a substantial discount.

The unadjusted price was 93.043033. Here is how that works out for a $10,000 investment:

Par value: $10,000
Inflation index on settlement date: 1.01335
Adjusted principal: $10,133.50
Unadjusted price: 0.93043033
Investment cost (adjusted principal x unadjusted price): $9,428.52
Plus, accrued interest: $52.25 (will be returned at first coupon payment)
Total cost: $9,480.77

To summarize, an investor buying $10,000 par actually paid $9,428.52 and will receive $10,133.50 in principal on the settlement date of November 30. After that, the investor will receive inflation accruals and a coupon yield of 1.375% until maturity on July 15, 2033.

We may not see many more reopening auctions with that large a cost below par value, at least for the near future, because new auctions will be much closer to current market yields. Since the spring of 2023, 10-year real yields have increased dramatically, rising more than 100 basis points since April:

Inflation breakeven rate

With the nominal 10-year Treasury note trading with a yield of 4.41% at the auction’s close, this reopened TIPS got a 10-year inflation breakeven rate of 2.23%, a bit below recent trends. Again, this looks like a positive for investors. The breakeven rate indicates that CUSIP 91282CHP9 will outperform a nominal Treasury if inflation is higher than 2.23% over the next 9 years, 8 months.

Here is the trend in the 10-year inflation breakeven rate over the last 12 months:

You could look at that zig-zagging chart and say, “The market has no idea where inflation is heading.” And you’d probably be right.

Reaction to the auction

Investors were aided by fairly weak demand and got an attractive result, at least compared to expectations. The TIP ETF, as shown in the chart, dipped in value right after the auction close, another indication demand was weak, resulting in a bump higher in real yields.

But for investors, getting an above-inflation yield of 2.18% is attractive. This was the highest real yield for any 9- to 10-year TIPS auction since January 2009. It came in just a bit higher than the previous reopening auction for this TIPS, on September 21 with a real yield of 2.094%.

From a Barron’s report yesterday posted on MSN:

Tuesday’s sale of 10-year Treasury inflation-protected securities was weak, a sign that traders believe inflation will continue to decelerate. … Buyers likely shunned the 10-year TIPS because data have shown that the pace of inflation continues to slow.

The auction closes out the history of CUSIP 91282CHP9. Next month, on Dec. 21, the Treasury will offer a reopening auction of a 5-year TIPS. Then on Jan. 18, 2024, it will issue a new 10-year TIPS.