Rarely seen: High real yield, high coupon rate, discount to par value.
Update: New 5-year TIPS auctions with a real yield of 1.732%, highest in 15 years
By David Enna, Tipswatch.com
The U.S. Treasury on Thursday will offer $21 billion in a new 5-year Treasury Inflation-Protected Security, CUSIP 91282CFR7. This auction will be so unusual in so many ways — based on the last decade of TIPS auctions — that I am calling it a “unicorn,” rarely seen and rarely captured. But here it comes.
Just how unusual? Let’s take a look:
- This TIPS is likely to generate a real yield to maturity of about 1.80%, the highest for this term since October 2008, when a reopening auction got a real yield of 3.270% amid the depths of the U.S. financial crisis.
- One year ago — one year! — a new 5-year TIPS was auctioned with a real yield of -1.685%, the lowest in history for any TIPS of any term. That is an incredible 348 basis points lower than Thursday’s likely result.
- The coupon rate could end up being 1.75%, which would be the highest for this term since April 2007. In fact, the last 12 new and reopening auctions of this term have had coupon rates of just 0.125%. No TIPS auction of any term has had a coupon rate at 1.75% or above since a 30-year auction in February 2011, more than 11 years ago.
- This new TIPS will have an inflation index of 0.99982 on the settlement date of Oct. 31, which means it is highly likely to have an adjusted price of less than or close to $100 par value. That hasn’t happened for a new issue of this term since April 2010.
- The reason the adjusted price could drift slightly above $100 is accrued interest, which has been negligible through all those auctions with 0.125% coupon rates. Investors will be purchasing 16 days of accrued interest on the settlement date of Oct. 31. If the coupon rate is 1.75%, accrued interest would be about 7 cents per $100, which could cause the adjusted price to rise slightly above $100. But this isn’t accrued principal or par value, and the interest will be returned to the investor at the first coupon payment on April 15, 2023.
- The auction size of $21 billion is the largest in history for a 5-year TIPS. In October 2019 the Treasury offered $17 billion in this term, which rose to $19 billion in 2021 and now $21 billion in 2022. That’s an increase of 24% in auction size in three years.
So, what’s not to like? Thursday’s auction of CUSIP 91282CFR7 is likely to generate a historically high yield, with a high coupon rate, at a lowish cost to par value. Meanwhile, the Treasury is pumping up the size of the offering, which should help keep the real yield high. (But I always note: Things can change.)
Definition: The “real yield” of a TIPS is its yield above official future U.S. inflation, over the term of the TIPS. So a real yield of 1.80% means an investment in this TIPS will exceed U.S. inflation by 1.80% for 5 years. If inflation averages 2.5%, you’d get a nominal return of 4.3%, pretty much on par with a nominal U.S. Treasury. But if inflation averages 4.5%, you’d get a nominal return of 6.3%.
Things can change by Thursday, but if the real yield holds at 1.80%, the coupon rate would be set at 1.75% and the unadjusted price would be somewhere around $99.75 for $100 of par value. But, because the inflation index is less than 1.0, the adjusted price will probably be something like $99.75 for $99.98 of accrued value (par value would remain at $100). All of this is a rough estimate, and that doesn’t include the accrued interest. The key is that investors at Thursday’s auction will be paying slightly less than par value.
For the buy-and-hold-to-maturity investor, this TIPS is a prize. The term is short. Sure, yields could continue rising higher, but you will have locked in a historically strong real yield over the next five years.
Here is the trend in 5-year real yields over the last 13 years, showing that the current real yield has surpassed the highest level of the Federal Reserve’s last tightening cycle, which peaked late in 2018. It’s a bit ominous, though, to see how quickly real yields declined in 2019 when the Fed changed course:
Inflation breakeven rate
With a nominal 5-year Treasury note now yielding 4.25% (which I think is attractive, by the way) a 5-year TIPS currently would have an inflation breakeven rate of 2.45%, which seems reasonable at a time when U.S. inflation is running at 8.2%, and only inching lower over the last two months. Historically, though, that is a high number and would indicate that a 5-year TIPS is expensive versus a nominal Treasury. Here is the trend in the 5-year inflation breakeven rate over the last 13 years:

This trend-line chart ends on Thursday, Oct. 13, the last day Fred had data. But the breakeven rate popped 10 basis points higher on Friday, possibly influenced by the release of a University of Michigan report on consumer attitudes. That report found U.S. consumers expect inflation to run at 2.9% over the next 5 years, up from 2.7% last month.
As the chart shows, however, market expectations of 5-year inflation have fallen fairly dramatically from a high of 3.59% on March 25, 2022. In span of 2009 through the post-pandemic surge higher in March 2020, the previous high was 2.45% on April 19, 2011, matching today’s number. Back in April 2011, U.S. inflation was running at 3.2%, versus 8.2% today.
Yes, I think a nominal 5-year Treasury yielding 4.25% is attractive, but I would still rather invest a 5-year TIPS with potential for a decent return, along with insurance against unexpectedly high inflation in the future. (Unexpected inflation is what we are experiencing today.)
Final thoughts
Unless market conditions change dramatically in the next few days, CUSIP 91282CFR7 is going to be an attractive purchase. If the real yield to maturity holds at around 1.80%, it has a 180-basis-point yield advantage over the U.S. Series I Savings Bond, if both are held for five years. But the TIPS lacks the I Bond’s sexy 9.62% annualized return for six months — I Bonds get that advantage because they track trailing inflation numbers. Nevertheless, over the next 5 years, this TIPS is likely to out-perform an I Bond with a fixed rate of 0.0%.
If you are considering investing in this TIPS, remember that things can change. You can track the Treasury’s estimate of the real yield of a full-term 5-year TIPS on its Real Yields Curve page, which updates after the market close each weekday. 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 the results soon after the auction closes at 1 p.m. EDT.
Thursday’s auction will be the first of four consecutive monthly auctions that are likely to be very attractive:
- Oct. 20, new 5-year TIPS
- Nov. 17, 10-year TIPS reopening
- Dec. 22, 5-year TIPS reopening
- Jan. 19, new 10-year TIPS
And of course, on January 1, you can again purchase I Bonds up to the $10,000 per person limit.
Here is a history of recent 4- to 5-year TIPS auctions, showing the long string of recent auctions with a coupon rate of 0.125%. Thursday’s result should be much higher:
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he discusses can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.


















They did reply and quickly, the next day in fact. However no illumination on what the future holds: Hello Matthew,…