After three months of volatility, where do we stand?

Posted on April 4, 2023 by Tipswatch

TIPS remain attractive. And now bank CDs are worth a serious look.

By David Enna, Tipswatch.com

It’s been kind of wild to go from seeing the possibility of TIPS with a real yield of 2% in early March to the possibility of 1% as we head into April.

The significant event in this downdraft came March 8, when Silicon Valley Bank announced a $1.8 billion loss on the sale of securities, including Treasury and mortgage bonds. The next day, shares of Silicon Valley Bank fell 60% and depositors began an social-media-fueled run on the bank.

The failure of SVB and Signature Bank led to a Federal Reserve bailout of non-protected depositors. And that bailout in turn fueled speculation that the Fed would soon pause its planned interest rate increases. But in the background, inflation still looms over the U.S. economy.

Here is the year-to-date trend for real yields on 5-, 10- and 30-year TIPS, along with the matching inflation breakeven rates:

TIPS real yields, 2023

I’ve highlighted this year’s high for real yields, which came on March 8, and also the low, which came 19 days later on April 3. Inflation breakeven rates haven’t been greatly affected by this turmoil, indicating that nominal yields have been tracking closely with real yields.

In the midst of this market turmoil, a 10-year TIPS was reopened at auction on March 23, getting a real yield to maturity of 1.182%, marking a drop of about 48 basis points in two weeks. Since then, real yields have continued falling.

Next up is a Treasury auction of a new 5-year TIPS on April 20. In just over a month, that upcoming auction has gone from looking stellar (real yield of 1.8%+) to looking just okay (real yield of around 1.13%). But a lot can happen in the next two weeks. I’ll be posting a preview article on that auction on Sunday, April 16.

I’ll point out that things continue to change quickly. Real yields appear to be heading even lower today.

What this all means

TIPS remain attractive. It’s painful to watch real yields decline right before you purchase a TIPS, but at this point real yields for TIPS remain above 1%. That’s a decent number given the ultra-low rates of the last dozen years. I’ll probably still be a buyer at the April 20 auction.

TIPS funds and ETFs are getting a boost. With markets anticipating a Fed rate slowdown, bond funds have been doing well in 2023. The broad-based TIP ETF is back above $110 (trading today at $110.66) after falling to as low as $104.96 last October. Holders of these TIPS funds can breathe a sigh of relief after a disastrous 2022.

Here is the year-to-date trend in the net asset values of the iShares TIPS Bond ETF and Vanguard’s Short-Term Inflation-Protected Securities ETF:

What about I Bonds? We are going to get a reset on both the fixed and variable rates for the U.S. Series I Savings Bond on May 1. The variable rate will probably fall to a range of about 3.2% to 3.5%, down dramatically from the current 6.48%. The fixed rate looks likely to hold at around 0.4%, I think, or just a bit higher.

I’ll still be a buyer up to the $10,000 purchase limit, probably in April but possibly in May. We’ll know more after the March inflation report is released on April 12.

I know a lot of investors will be bailing on I Bonds this year, but I like them as a long-term investment, pushing inflation-adjusted cash into the future with zero risk. Sometime in the future, I believe, interest rates will again be near zero and I Bonds will be out-performing every other safe investment.

Nominal Treasurys are losing appeal. Thinking of investing in nominal Treasury bills, notes or bonds? Focus on the T-bills with maturities of 6 months or less, where yields continue to be appealing. Here’s a comparison of Treasury estimates from March 8 to April 3:

While short-term rates have declined slightly, the drop in medium-term Treasury rates has been much more dramatic, with the yield on a 2-year Treasury note down 108 basis points and the 5-year down 82 basis points. The 10-year note is down 55 basis points, surpassing the 39-basis-point decline in the 10-year TIPS real yield. I my opinion, this makes TIPS more appealing versus the nominal Treasury.

Bank CDs are gaining appeal. I posted an analysis Sunday morning noting that certificates of deposit offered by banks and credit unions are becoming more attractive as financial institutions scramble to build deposits. One- and two-year CDs are now yielding more than 5%. You can find a 5-year CD with a yield of 4.5%, which sets up an inflation breakeven rate of 3.4% versus a 5-year TIPS. That looks compelling.

Will inflation average more than 3.4% over the next 5 years? It’s possible, but it’s a close call. That makes TIPS and high-yielding bank CDs complimentary investments.

Cash is now A-OK. Getting 4%+ safely on your cash holdings is a wonderful thing, after years of earning around 0.01%. (It was strange at tax time to realize you didn’t have to report your lofty annual interest of 92 cents.)

Those ultra-low interest rates forced many investors to take risks, boosting bizarre investments like Dogecoin, NFTs and GameSpot. But I should mention that one very safe investment — the U.S. Series I Savings Bond — also surged in popularity as inflation began rising.

Now cash is earning a spot in your portfolio. For shorter-term cash needs, T-bills are the choice, or a high yielding Treasury money market fund like Vanguard’s VUSXX. In a recent article, investment manager William Bernstein made the case for combining TIPS for the long term and T-bills on the short term. He noted:

A TIPS is risky in the short term and riskless in the long run, which is precisely the opposite of, and complementary to, a T-bill, which is riskless in the short term but, because of reinvestment rate volatility, risky in the long run.

Final thoughts

TIPS remain appealing because of the inflation protection they provide as we are head into an uncertain future. For me, I Bonds will remain an automatic investment. I will continue to roll over 13- and 26-week Treasury bills as a core cash holding. And will keep hunting for attractive CD rates, either directly from banks or through brokerages.

In other words: I’m staying the course. What do you think? Post your thoughts in the comment section 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 Bank CDs, Cash alternatives, ETFs, I Bond, Inflation, Investing in TIPS, Treasury Bills | 45 Comments

Here’s a surprise: CD rates are suddenly very attractive

Posted on April 2, 2023 by Tipswatch

But don’t go to your local mega bank. Look for better deals.

By David Enna, Tipswatch.com

For years, CD rates offered by banks and credit unions — even the aggressive online versions — have been stubbornly lower than rates paid on short- and medium-term U.S. Treasurys.

Less than a year ago, in July 2022, I noted that Treasury bills had a nice advantage in yields over CDs, with the 1-year yielding 2.79% versus about 2.0% for best-in-nation bank CDs. When I came back to this topic in September 2022, the 1-year was up to 4.03%, much higher than the best bank CDs at 3.1%.

Now this has changed. The U.S. banking system has been roiled by two major bank failures in recent weeks, an event that followed months of deposit outflows from banks to higher-yielding Treasurys and money-market funds. This is from a recent USA Today article:

With some jittery depositors shifting their money from regional banks to large ones, at least some banks are lifting their savings account and CD rates to incentivize customers to stay put or to attract new money to replenish reserves, analysts say.

“It’s likely that concerns about maintaining deposit levels have put upward pressure on some deposit rates at some banks,” says Ken Tumin, founder of DepositAccounts.com, which tracks bank savings and CD rates. Banks, he says, want to “shore up their deposits to reduce the odds of being hurt by a bank run.”

Details at TruliantCFU.org.

In this current climate, banks and credit unions are looking to build up deposits and many are aggressively promoting attractive CD rates. For example, this offer from N.C.-based Truliant Federal Credit Union has been appearing in full-page ads for several days in The Charlotte Observer.

My wife and I happen to have a small savings account at Truliant (a remnant from ages-ago CD offers) and so I thought: “Why not?” Within a day, we had nabbed the 23-month CD paying 5.35%. I was especially interested in this offer because of the longer term, 23 months. My thinking: It’s possible we have reached a peak in U.S. interest rates. If that’s true, I want to lock in good rates for a longer term.

Another positive … this is proof that newspaper advertising still works.

Let’s take a look at the current state of shorter-term interest rates, across all the safe options. I’ll use this Truliant offer as an example for 1- and 2-year CDs, but you probably can find slightly higher rates around the nation.

  • 2-year bank CD: 5.35%
  • 1-year bank CD: 5.35%
  • 26-week Treasury bill: 4.94%
  • 13-week Treasury bill: 4.85%
  • 4-week Treasury bill: 4.74%
  • Vanguard Treasury Money Market: 4.70%
  • 1-year Treasury bill: 4.64%
  • 5-year bank CD: 4.50%
  • 2-year Treasury note: 4.06%
  • 5-year Treasury note: 3.60%

What’s interesting is that shorter-term Treasury yields have been falling 50 basis points or more over the last month, at the same time CD rates are rising. The yield on a 2-year Treasury note, for example, fell from 4.89% on March 1 to 4.06% on March 31. Here is a chart showing the two-year yield trend for 2- and 5-year Treasury notes, showing the recent declines at a time of rising CD rates:

Click on image for larger version.

How to find up-to-date offers

One thing for sure: You have to be picky when investing in CDs. For example, Bank of America is currently paying 0.03% for a 1-year CD. (And this offer is only good through April 2! Thanks for the April Fool’s joke, BofA.) But the sad thing is that Chase and Wells Fargo are offering even less: 0.01%. These monster-sized banks don’t want or need your money.

So, where to look for something better? In the “old days” I would go to BankRate.com to find CD and savings rates. I still use it at times, but a better option is DepositAccounts.com, which does a great job of presenting unbiased information. For example, on its homepage, you can learn that the top 1% of 1-year bank CDs are paying 5.17% and the national average is 2.87%.

Here is information I found on Friday for best-in-nation 2-year CD rates.

Are credit unions off limits?

Note that several of the higher-paying institutions are credit unions, which can present tricky problems in opening an account. Ken Tumin of DepositAccounts.com notes: “All credit unions are required to have a field of membership which defines a common bond for members.” But for many institutions, which Tumin calls “all-access credit unions,” there are ways of “joining the club.”

Tumin has compiled a list of these all-access credit unions, along with information on how you can qualify.

Read the fine print

Many attractive bank and credit union CD offers will have minimum investment limits and most will have early withdrawal penalties. In the case of the Truliant offer, the minimum investment was $10,000, which had to be new money coming into the credit union. Here are Truliant’s early withdrawal penalties, which look standard:

  • Term of at least 7 days but less than 12 months: 90 days of dividends or dividends since opening/renewal, whichever is less
  • ​Term of at least 12 months but less than 48 months: 180 days of dividends or dividends since opening/renewal, whichever is less
  • ​Term of 48 months or longer: 365 days of dividends or dividends since opening/renewal, whichever is less 

What about brokered CDs?

In recent months I’ve had several readers report they’ve found great deals on brokered CDs, which are purchased through a brokerage instead of directly from a bank. These are tricky investments, because many offer great rates but are callable after a short period of time. Also, these investments do not reinvest the interest, so there is no compounding over time.

It takes hunting to find good deals. For example, here are the best brokered CDs available on Vanguard’s trading platform on Friday morning. None of these are particularly attractive, and the top two 5-year CDs are callable after several months.

Brokered CDs have the same FDIC insurance as any direct issue from a bank, up to $250,000 per bank (or whatever the Fed decides this week.) This makes brokered CDs particularly attractive for high-wealth investors, because they can spread $250,000 investments across many banks without opening individual accounts. Plus, there is a secondary market for the CDs and no penalty for exiting early.

The hassle factor is lower with brokered CDs. I understand the appeal. The reason the Truliant offer was attractive and easily available was: We already had an account there. Would I have been willing to open a new account elsewhere? Maybe not.

State income taxes

If you live in a state with a high tax on income, realize that the tax will reduce a CD’s yield advantage over a U.S. Treasury, which is free of state income taxes. That won’t matter in a tax-deferred account, however.

Final thoughts

Over the last decade-plus of ultra-low interest rates, at times I was able to leap into 5-year CDs paying 3%. I considered those major investing victories. Now I’d really like to find a 5-year CD paying 5% or higher. No luck. So I grabbed the 23-month CD last week. It’s not a life-changer, but getting 5% on my money just feels good.

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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 Bank CDs, Cash alternatives, Treasury Bills | 52 Comments

Want to exit your I Bond investment? You’d better have a plan.

Posted on March 29, 2023 by Tipswatch

Aug. 6, 2023, update: The I Bond exit ramp is now open; proceed with caution

By David Enna, Tipswatch.com

For years, my constant advice about redeeming I Bonds has been this: “Don’t do it until you really need the money.” I advocate investing in I Bonds every year, no matter the fixed and/or variable rates, and holding that investment for the long term.

I Bonds are a U.S. Treasury investment.

Because of the purchase limit of $10,000 per person per year, buying every year and holding is the only way to build a large stockpile of super-safe, tax-deferred, inflation-protected cash. After five years, you can begin withdrawing with no penalty. It’s reassuring to have an inflation-protected, tax-deferred savings account. And this can be very useful in retirement years when you begin to need the money.

But … investors who jumped aboard I Bonds in the last couple years had a different priority: To maximize interest earned at a time when other safe investments were paying near 0.0%. Inflation protection wasn’t the goal. It was a logical and perfectly sensible investment: Nab 3.54% for six months, then 7.12%, then 9.62%. Wonderful.

No I Bonds have ever reached their 30-year maturity, so that means every I Bond in existence will be paying at least 6.48% annualized for six months after the 9.62% rate runs its course. And after that …. probably a lot less. The I Bond’s variable rate is likely to fall to about 3.2% to 3.5% at the May 1 reset. That is lower than the current nominal yield on the entire spectrum of Treasury bills, notes and bonds.

After May 1, people investing in I Bonds for the short term will be looking to exit this investment and move into a higher nominal interest rate. But this is a tricky transaction, because of the three-month interest penalty on I Bonds held less than 5 years. Get this wrong and you could lose 3 months of 6.48% interest, or more.

Here’s a walkthrough on ideal redemption months for I Bond investments in April, May, October and November for 2020 through 2022. These are high-volume months for I Bond purchases because they bracket the rate resets on May 1 and November 1.

All the data in this presentation is drawn from EyeBonds.info, a helpful and reliable site that presents detailed information on I Bonds. Click on any image to see a larger version.

If you bought in April 2020

These I Bonds have a fixed rate of 0.2%. Don’t redeem them if you have others with a fixed rate of 0.0%. Always hold your I Bonds with higher fixed rates until you really need the money.

A $10,000 investment in April 2020 is still be earning a composite rate of 9.83% through the end of this month, and then on April 1 will transition to a composite rate of 6.69% for six months. It will be worth $11,760 on October 1, 2023.

Ideally, the earliest time to redeem will be Jan. 1, 2024. (But don’t redeem these if you have other options with a 0.0% fixed rate.)

If you bought in May 2020

These I Bonds have a fixed rate of 0.0%, so they are a potential target for redemption. They are currently earning a composite rate of 6.48% through the end of April. On May 1 a $10,000 investment will be worth $11,560.

Ideally, the earliest time to redeem will be Aug. 1, 2023.

If you bought in October 2020

These I Bonds have a fixed rate of 0.0%, but are still earning a composite rate of 9.62% through the end of March. Then they will earn 6.48% annualized through the end of September. On Oct. 1, a $10,000 investment will be worth $11,560.

Ideally, the earliest time to redeem will be Jan. 1, 2024.

If you bought in November 2020

These I Bonds have a fixed rate of 0.0% and will continue earning an annualized interest rate of 6.48% through the end of April. On May 1, a $10,000 investment will be worth $11,500.

Ideally, the earliest time to redeem will be Aug. 1, 2023.

If you bought in April 2021

These I Bonds have a fixed rate of 0.0%, so they could be a target for redemption. But through the end of March 2023, they are still earning an annualized yield of 9.62%, then will transition to 6.48% for six months. On Oct. 1, 2023, a $10,000 investment will be worth $10,500.

Ideally, the earliest time to redeem will be Jan. 1, 2024.

If you bought in May 2021

These I Bonds have a fixed rate of 0.0% and will continue earning an annualized yield of 6.48% through the end of April. On May 1, a $10,000 investment will be worth $11,404.

Ideally, the earliest time to redeem will be Aug. 1, 2023.

If you bought in October 2021

These I Bonds have a fixed rate of 0.0% and are currently earning an annualized rate of 9.62% through the end of March. They will then transition to six months of 6.48%. On Oct. 1, a $10,000 investment will be worth $11,404.

Ideally, the earliest time to redeem will be Jan 1, 2024.

If you bought in November 2021

By November 2021, investor passion for I Bonds was starting to ignite. These I Bonds started with an annualized rate of 7.12% for six months and then 9.62% for six months. Now they are earning 6.48% through the end of April.

Ideally, the earliest time to redeem will be Aug. 1, 2023.

If you bought in April 2022

These I Bonds can’t be redeemed until April 1, when the one-year holding period ends. They have a fixed rate of 0.0% but are still earning 9.62% annualized through the end of March and then will transition to 6.48% for six months. A $10,000 investment will be worth $11,208 at the end of October.

Ideally, the earliest time to redeem will be Jan. 1, 2024.

If you bought in May 2022

These I Bonds cannot be redeemed until May 1, when the one-year holding period ends. They have a fixed rate of 0.0% and are currently earning 6.48% through the end of April. A $10,000 investment will be worth $10,820 at the end of April.

Ideally, the earliest time to redeem will be Aug. 1, 2023.

If you bought in October 2022

By October 2022, interest in I Bonds had escalated to the point of crashing the TreasuryDirect website, because of the extremely attractive annualized rate of 9.62%. These I Bonds cannot be redeemed until Oct. 1, 2023, when the one-year holding period ends. They have a fixed rate of 0.0% and are currently earning 6.48% through the end of September.

Ideally, the earliest time to redeem will by Jan. 1. 2024.

If you bought in November 2022

Because these I Bonds have a fixed rate of 0.4%, they should not be your first option for redemption. If you need the money, look at redeeming I Bonds with a 0.0% fixed rate first. These I Bonds are earning a composite rate of 6.89% through the end of April, and then will transition to six months of a new, unknown composite rate based on the fixed rate of 0.4% plus a new variable rate to be set on May 1.

The earliest time to redeem will be Nov. 1, 2023, but as I noted, the fixed rate of 0.4% makes these a poor choice for redeeming if you have other options.

If you bought in other months

The pattern is consistent for all I Bonds, no matter the year they were purchased. If you bought an I Bond any time in recent years, here are the ideal times to consider redemptions to minimize the three-month interest penalty:

  • January: After Oct. 1, 2023.
  • February: After Nov 1, 2023
  • March: After Dec. 1, 2023
  • April: After Jan. 1, 2024
  • May: After Aug. 1, 2023
  • June: After Sept. 1, 2023
  • July: After Oct. 1, 2023
  • August: After Nov. 1, 2023
  • September: After Dec. 1, 2023
  • October: After Jan. 1, 2024.
  • November: After Aug. 1, 2023
  • December: After Sept. 1 2023.

Does this really matter?

A Twitter follower pointed out today that the cost of the three-month interest penalty on $10,000 earning 6.48% annualized “is only $162, so who cares?” It’s a good point, but I know many of my penny-pinching readers really do care. That’s why I love you guys.

So it becomes a math question. Anytime you redeem I Bonds before five years, figure out the amount of the three-month penalty and ask yourself: Will my alternative investment earn enough to make up the difference?

Final thoughts

A few readers have chided me for helping people manage short-term investments in I Bonds. “These are supposed to be long-term investments!” But the reality of near-zero interest rates sent people flooding into I Bonds in the last two years, and the new reality of 4%+ interest rates on safe Treasurys will cause some investors to shift to something new. It’s all good. I like the idea of mixing inflation protection (I Bonds and TIPS) with nominal investments (Treasury bills and notes), which provide deflation protection.

But every investor, I think, should devote some asset allocation to inflation protection. We definitely aren’t out of the haunted forest yet, for now or the future.

• Let’s handicap the I Bond’s May fixed-rate reset

• I Bonds: A not-so-simple buying guide for 2023

• 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, Savings Bond, Treasury Bills | 73 Comments

10-year TIPS reopening auction gets real yield of 1.182%

Posted on March 23, 2023 by Tipswatch

By David Enna, Tipswatch.com

The U.S. Treasury just reported that its offering of $15 billion in a reopened 10-year TIPS — CUSIP 91282CGK1 — generated a real yield to maturity of 1.182%, a bit higher than expected.

This TIPS has a coupon rate of 1.125%, and it was trading on the secondary market with a real yield of 1.15% in the hour before the auction closed. So it looks like demand was weak for this offering. The bid-t0-cover ratio was 2.28, well below the originating auction’s 2.79 on Jan. 19, 2023. That January auction drew high demand; but demand for this reopening looks pretty weak.

Here is a chart of the 10-year real yield over the last 13 years, showing that today’s yields remain high based on historical trends:

Pricing

This TIPS will have an inflation index of 1.00409 on the settlement date of March 31. Investors paid an unadjusted price of about 99.473545 for $100 of par value. The adjusted price, which includes the inflation accrual, was 99.880392.

This means an $10,000 par investment in this TIPS was actually purchasing $10,040.90 of principal, at a cost of $9,988.04. One positive point is that investors paid below par value for a higher amount of principal. The value of a TIPS investment can never fall below par value at maturity, even in a time of severe deflation.

Plus, this TIPS will pay a coupon rate of 1.125% for the next 10 years.

Inflation breakeven rate

At the auction’s close, a 10-year nominal Treasury note was yielding 3.44%, creating an inflation breakeven rate of 2.26% for this reopened TIPS. This looks like a reasonable number, a bit below most recent auctions of this term.

Here is the trend in the 10-year inflation breakeven rate over the last 13 years, showing the recent decline in inflation expectations as the Federal Reserve continues increasing short-term interest rates:

Final thoughts

I arrived at a hotel in Athens, Greece, about 10 minutes before this auction closed. I am pleased I was able to post this abbreviated version of my usual auction report. Now I am off to dinner (it is 7 p.m. Athens time.) If you invested in this TIPS, please post your reactions and thoughts in the comments section below.

From today’s Reuters report:

The Treasury Department saw slightly soft demand for a $15 billion sale of 10-year Treasury Inflation-Protected Securities (TIPS) on Thursday. The debt sold at a high yield of 1.182%. Demand was below its recent average at 2.28 times the amount on offer.

Here is a recent history of auctions of this term:

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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 | 19 Comments

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

Posted on March 19, 2023 by Tipswatch

But be prepared for another wild week.

By David Enna, Tipswatch.com

I know how disappointing it can be to be waiting to pull the trigger on an investment in a Treasury Inflation-Protected Security, only to see real yields slide lower, making that TIPS less attractive.

It happens. And that’s why I think it is a sensible strategy to make investments regularly as long as real yields are historically reasonable. And that brings us to CUSIP 91282CGK1, which will be reopened at auction on March 23, creating a 9-year, 10-month TIPS. The Treasury is offering $15 billion of this reopened TIPS.

Two months ago, on Jan. 19, this TIPS had an originating auction that generated a real yield to maturity of 1.22%, a bit disappointing. But then real yields started climbing, with the 10-year real yield hitting a year-to-date high of 1.66% on March 8, making the upcoming March 23 auction look highly attractive.

And then, a day later, we got a banking crisis and a Federal Reserve bailout, sending real yields plummeting. The smoke hasn’t cleared, but as of Friday’s market close, CUSIP 91282CGK1 was trading with a real yield to maturity of 1.33%, down about 33 basis points in a week but still 11 basis points above the yield of the Jan. 19 originating auction.

So, despite the turmoil, CUSIP 91282CGK1 still looks like a perfectly acceptable investment, in my opinion. Of course, we’ll have to wait to see how the bond market roils in coming days. This is a time of high volatility.

One thing to be aware of (or … should I say beware of?) is that the Federal Reserve will make an interest rate announcement Wednesday at 2:15 p.m. ET and also announce its future rate forecasts. Odds are that the Fed will opt to continue 25 basis-point increases, but this is highly uncertain. The announcement and forecasts come less than 24 hours before the TIPS auction closes at 1 p.m Thursday. Things could get shaken up.

If you are interested in investing in CUSIP 91282CGK1, you can check its current real yield in real time on Bloomberg’s Current Yields page. This data won’t perfectly predict Thursday’s auction result, but it should end up reasonably close.

Here is the trend in the 10-year real yield from the beginning of 2019 (at the end of the Fed’s last tightening cycle) to March 2023 as the Fed continues its newest tightening cycle:

Click on the image for a larger version.

Here’s the point: As long as 10-year real yields sustain above 1%, they remain attractive as an investment. We can’t know the direction of future interest rates. But current rates are at least historically attractive.

Update on pricing

I just checked Monday morning (Montenegro time) and CUSIP 91282CGK1 was trading with a real yield of 1.24% and price of 98.99 for $100 of value. This TIPS will have an inflation index of 1.00409 on the settlement date of March 31. So an investor purchasing $10,000 in par value will be actually buying $10,040.90 of accrued principal. Apply a price of 0.9899 and you get a total cost of $9,939.48. Of course, this will change before Thursday’s auction close.

Inflation breakeven rate

With the 10-year Treasury note closing Friday with a nominal yield of 3.43%, CUSIP 91282CGK1 currently has an inflation breakeven rate of 2.1%, lower than recent trends. In fact, it seems remarkably low at a time when U.S. inflation is sustaining at 6.0%.

This breakeven rate means that the TIPS will outperform the nominal Treasury as long as inflation averages more than 2.1% over the next 9 years, 10 months. Over the last 10 years, U.S. inflation has averaged 2.6%.

Here is the trend in the 10-year inflation breakeven rate over the last three years, showing that 2.1% looks reasonable when compared with the recent trend line:

Click on the image for a larger version.

Final thoughts

I am writing this on Saturday afternoon in beautiful Dubrovnik, Croatia (a nation where annual inflation is currently running at 12%). This is another reminder that inflation is a global issue, not caused — or solved — completely by U.S. policies. Because of this trip, I decided to skip this TIPS reopening auction. Instead, 10 days ago I bought a TIPS on the secondary market, maturing in January 2032. I nabbed a real yield of 1.66%. Now it is trading at 1.29%.

That was luck, not investing skill. But the lesson was to take advantage of favorable real yields when you see them. If 10-year real yields hold around 1.3% before Thursdays auction, I think CUSIP 91282CGK1 will be an acceptable addition to your TIPS collection.

And yes, I did buy CUSIP 91282CGK1 at the originating auction with a real yield of 1.22%. That one wasn’t so lucky, but it was fine. It all balances out.

If you are considering bidding at Thursday’s auction, I urge you to keep an eye on Bloomberg’s Current Yields to track the yield trend. 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’ll be posting results sometime Thursday (I hope), but because of iffy internet on this trip, it will be impossible to predict when. Here’s a history of 9- to 10-year TIPS auctions back to 2019:

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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, Inflation, Investing in TIPS, TreasuryDirect | 21 Comments