Want inflation protection? Be wary when the fund salesman calls.

Posted on June 7, 2021 by Tipswatch

The Lord Abbet Inflation Focused fund is a mixed-bag short-term corporate bond fund, not a typical TIPS fund

By David Enna, Tipswatch.com

I have an elderly friend (she’s 90+ years old so I think it’s OK to call her elderly) who is whip-smart and able to monitor her own finances. But sometimes she calls me for advice on safety-first investments.

“I am not a financial adviser!” But I listen. In this case, she had a Goldman Sachs brokered CD that was paying 3%, but got called, leaving her with more than $50,000 in cash and no good alternatives that would yield more than 0.5%. This cash was now in the hands of a “wealth adviser” who is “affiliated” with her credit union.

She told the adviser that she is worried about surging inflation. His advice: Put that cash into the Lord Abbet Inflation Focused Fund, either class A or class C.

She asked me: “What do you think of these funds?” I think she already had a good idea what I was going to say. Like I said, she’s smart.

Well, let’s see … the class A version (LIFAX) comes with a 2.5% upfront load and an expense ratio of 0.70%, and the class C version (LIFCX) has no upfront load, but a 1.31% expense ratio and a 1% redemption fee. Does it make sense for a 90+ year old to pay a 2.5% load to buy into any mutual fund? No. Does it make sense to pay an expense ratio of 1.3% and a redemption fee of 1% when there are much cheaper options? No.

(FYI, LIFAX can be purchased at Fidelity — and probably other quality online brokers — with the load fee waived. But her wealth adviser wasn’t offering her that opportunity).

I am not a financial adviser, but this looks like questionable advice to me. My immediate advice would have been to just open an online savings account paying 0.5% and live with it. But my friend was looking for a safe investment with a reasonable return that could rise with surging inflation. She is very worried about inflation.

So, my suggestion was that she look at a couple of ETFs that hold Treasury Inflation-Protected Securities: Schwab’s SCHP, which holds the full range of maturities, and Vanguard’s VTIP, which holds maturities of 0 to 5 years. Both of these have expense ratios of 0.05% and can be purchased without any commissions at most brokers.

The Lord Abbet Inflation Focused fund is an easy “sell” right now because it has had a spectacular performance in the last year, with its class A shares gaining 21.4%, versus returns of about 7% for typical TIPS funds. But why was that gain so high? Because this fund skews much higher in risk, with large holdings of corporate bonds, asset-backed securities and even 13.5% of assets in junk bonds. Its U.S. Treasury holdings are right around 11% of assets. It is NOT a traditional inflation-protected fund, even though Morningstar classifies it as “Inflation-Protected Bond.”

This chart shows how it is unlike traditional inflation-protected funds, with low fees, no sales charges and investment focused on U.S. Treasurys:

Look back 10 years, and The Lord Abbot fund’s annual return is only 1.9% (class A) and 1.2% (class C). This fund carries much higher risk than the typical TIP fund, even though its duration is quite low, at 1.44 years. Here is how LIFAX has performed versus SCHP and VTIP over the last five years:

This chart — which doesn’t reflect any load fee paid by the investor — shows how the recent out-performance of LIFAX can’t overcome years of poor performance in a time of consistently declining interest rates. This is from Morningstar’s investment analysis:

“Lord Abbett Inflation Focused’s aggressive style and unconventional inflation-protection tools have contributed to a volatile experience for investors in its otherwise conservative peer group. … This strategy’s allocation closely mirrors Lord Abbett Short Duration Income LLDYX, which carries a risky profile through significant corporate bond stakes (40%-55% of assets) and securitized credit (35%-55%). Exposure to below-investment-grade issues accounted for 14% of this portfolio at the end of July 2020 and even reached 25% back in 2014. …

“(T)his team hedges against inflation via Consumer Price Index swaps as they are less sensitive to interest-rate spikes than TIPS. Still, they can be volatile with changes in inflation expectations.”

So, it is clear that Lord Abbet Inflation Focused is much more of a short-term corporate bond fund with very little direct exposure to U.S. Treasurys. That raises the question: How has it done versus more traditional short-term corporate bond funds, such as VCSH, Vanguard’s short-term corporate bond ETF, with an expense ratio of 0.05%? Here you go:

Keep in mind that this chart does not reflect the 2.5% load fee charged by advisers. LIFAX was down more than 20% in the depths of the market mania of March 2020, but has rebounded nicely since then. VCSH was less volatile.

So for the investor looking for a short-term corporate bond fund with an overlay of inflation swaps and high volatility, LIFAX could be worth a look. (But try to find a way to buy it without the load fee.) Otherwise, if you have a priority on safety and low fees, look elsewhere.

For risk-welcoming investors looking for a twist on inflation protection, I think a fund like The Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL) is worth a look. I don’t own it and haven’t analyzed it carefully. It has an annual expense ratio of 0.99% — a negative — but at least it holds 85% of its assets in SCHP, so it is heavily exposed to TIPS. Then it adds long options tied to the U.S. interest rate curve, so it can benefit from volatility. It had a total return of 14.6% in 2020. It’s a new fund and may not have a large enough trading volume for your brokerage to allow dividends to be reinvested.

So what did my friend do?

After a couple of discussions with me — which basically confirmed her point of view — she asked her wealth adviser if he could put her $50,000 in SCHP or VTIP or some combination, and how much it would cost. She said he paused. Then he said, “I think I could do that with about a $300 commission.”

She laughed. I told you she is smart. She asked for the money to be sent to her by check, and she will no longer work with that adviser. She has a T.D. Ameritrade account where she can buy the ETFs she wants at zero cost.

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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 purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

Disclosure: I have investments in SCHP and VTIP.

Posted in Cash alternatives, Investing in TIPS, Retirement | 11 Comments

T-Mobile Money: A weird (but insured) way to earn 1% on your cash

Posted on June 1, 2021 by Tipswatch

And here’s the thing: You don’t need to be a T-Mobile customer

By David Enna, Tipswatch.com

Back in mid-February, my cellphone carrier T-Mobile sent me an intriguing email about what seemed to be a new service offering: T-Mobile Money, an FDIC-insured savings account that paid 4% on deposits up to $3,000 and 1% on all balances above $3,000.

Was there a catch? Of course there was a catch. To get the 4% “perk” you had to make at least one $200 deposit a month into the account, either through transfer or direct deposit. Plus, you had to be an existing T-Mobile customer. Since I was already a customer — of both the company’s excellent cellular service and the ill-fated TV streaming service — I jumped aboard. I opened an account. I deposited $3,000. Then I set up an automatic transfer of $200 a month into the account.

Bingo … I earned 4% on my initial investment for the partial month of February. This was so simple! This was so great! The requirement to make one $200 deposit a month was no barrier. I loved this!

Then … less than a month later came the bad news. T-Mobile was changing the terms for the 4% perk, effective March 31. The new terms were onerous: To earn 4% on the first $3,000, I had to make 10 purchases a month using the provided MasterCard debit card. And that meant “purchases,” not simply using the ATM card to withdraw cash. So the 4% perk was now useless to me. I rarely use a debit card for purchases (especially during a pandemic) and my credit cards already provide 1% cash back.

T-Mobile continued to advertise the old terms ($200 deposit a month) well into March. My initial reaction to all of this was to throw a fit, stomp my feet, and accuse T-Mobile of a “bait and switch.” This was happening at the same time T-Mobile was dissolving its TVision television streaming service, which I was using and actually liked. Grrrr!

Count to 10, Dave, and … calm down

After a bit of research, I realized that T-Mobile Money had actually launched in 2019 and so the change in the long-standing 4% perk couldn’t really be classified as a “bait and switch.” It was a “change in terms.” Throw out the 4% perk, and what remains? 1% on all deposits, with full FDIC insurance. Does that make sense as an investment? Yes, it does.

Once you retire, you get obsessive about hoarding some level of cash, even beyond the “emergency fund” recommendations of 6 months of expected spending. Having one or two years of “after tax” cash allows you to ignore stock market fluctuations and plan for vacations, big-ticket purchases, home repairs, etc., without needing to tap retirement funds or stock investments — incurring a tax consequence.

The problem right now is that you can earn next to nothing on cash in highly safe investments like bank CDs, short-term Treasurys and money-market accounts. The typical rate paid by your brokerage or bank account is something like 0.005%, if that. So T-Mobile Money’s offer of 1% in an FDIC-insured account is way more attractive.

Here’s a comparison of potential earnings for “cash-like” investments with very little risk, showing why this T-Mobile Money account stands out in a barren wasteland:

As the amount invested increases, the value of the 4% perk declines, because it only applies to the first $3,000. T-Mobile Money, paying 1% interest, easily outshines other very safe cash-like investments. So I stuck with it, and added funds to the account. Everything can be handled on the T-Mobile Money website, and through its excellent phone app.

Do you need to be a T-Mobile customer to open an account? No you don’t. The 4% perk is limited to existing T-Mobile customers, but everyone gets the 1% interest on all deposits.

Questions and answers about T-Mobile Money

Is the T-Mobile Money account FDIC insured?

Yes. The account is actually held at BankMobile, a division of Customers Bank. The FDIC certificate number is 34444. This means your deposits are insured by the Federal Deposit Insurance Corporation up to $250,000 per customer.

Can anyone sign up for a T-Mobile Money account?

The 4% interest up to $3,000 is only available to T-Mobile customers, but you don’t need a wireless plan with T-Mobile or Sprint to sign up for a T-Mobile Money account. To sign up for an account you must:

  • Be of legal age
  • Have a US government-issued ID or state-issued driver’s license/ID
  • Have a Social Security number
  • Have a street address within the U.S. and Puerto Rico, excluding other U.S. territories

What are the monthly fees?

There are no monthly fees or minimum balance fees, no overdraft fees, no transfer fees. For ATMs, there are no fees at 55,000+ in-network Allpoint ATMs worldwide and no T-Mobile Money out-of-network fees. However, customers may incur fees from ATM providers when using out-of-network ATMs or international ATMs.

How can I deposit money?

The business model seems to be set up around direct deposit of your paycheck or government payment and then use of the ATM card. So, direct deposit is allowed, and the website and app clearly show you your account number and routing number.

You cannot deposit checks at an ATM, but you can deposit them through the T-Mobile Money app on your phone, using the phone’s camera. Mobile check deposits are limited to $3,000 a day.

You can do bank transfers into T-Mobile Money in the app, but these are limited to $3,000 a day. However, you can also set up T-Mobile Money to receive an incoming deposit from your bank or brokerage. Then the amount can be higher, up to the bank or brokerage’s outgoing per day limit. (I have tested this and it works.)

Depositing a large amount of cash? Forget it. You’ll need a money order, check or direct transfer to make a deposit.

How can I withdraw money?

It’s a similar situation to depositing money. If you are initiating a withdrawal from inside the T-Mobile Money app or website, you are limited to withdrawing $3,000 a day. But if you initiate the withdrawal from an outside source (such as your bank or brokerage connected to T-Mobile Money) you are only subject to that account’s incoming limits.

So, advice: Make sure to set up both an incoming connection to your outside account on the T-Mobile Money site ($3,000 limit in or out per day) and also a incoming/outgoing connection to T-Mobile Money from your bank or brokerage account (probably a higher limit, set by your bank or brokerage, not T-Mobile Money.)

How long does it take for deposited money to show up in your available balance?

External transfers in take 2 to 4 business days to be available. Incoming wire transfers are available on the same day they arrive. T-Mobile Money says payroll-related direct deposits can be available up to 2 days early.

Can I open a savings account instead of a checking account?

No.

Can I open an joint account?

T-Mobile says: “Joint accounts are currently unavailable. Only one account may be opened per person.” There is also no apparent way to name a beneficiary for the account. This could be a major drawback from some investors.

Does T-Mobile Money provide free checks?

No. The online account sends you to Vistaprint so you can order your own checks, at a cost ranging from 10 cents to 16 cents per check. However, T-Mobile Money does provide three free checks when it sends you your initial ATM debit card.

Does T-Mobile Money rebate ATM fees?

T-Mobile says: “If you use an out-of-network ATM, we won’t charge you, but the ATM owner probably will, and we aren’t able to rebate those fees.”

Can you get T-Mobile Money support at a T-Mobile store?

No.

How does T-Money make sense as a business?

T-Mobile says: “We expect to see revenues from merchant transaction fees when a customer pays with their T-Mobile Money MasterCard debit card. Over time, we expect to see additional operational benefits in our core business in increased customer retention and reductions in payment expenses.”

Conclusion

Despite my disappointment with the bait-and-switch … er … “change in terms” for the 4% perk, I think earning 1% in an FDIC-insured account is attractive in our current market conditions. That’s probably nearly 100 times what your bank or brokerage cash account is paying, and about double the yield of the best-in-nation online savings accounts.

There are times I feel like a T-Mobile beta-tester (the TVision streaming service was an unfortunate example), but in this case, at least so far, T-Mobile Money seems to be a solid product.

If the terms change, or interest rates elsewhere improve greatly, my deposits are always available to invest elsewhere.

Posted in Bank CDs, Cash alternatives, Retirement | 25 Comments

All of a sudden, inflation is a ‘thing’

Posted on May 23, 2021 by Tipswatch

By David Enna, Tipswatch.com

I’ve been writing about inflation and inflation-protected investments for 10 years, and most of that time, actual U.S. inflation has been sleepy and dull. Suddenly, but not too surprisingly, that has changed.

Official U.S. inflation — measured by CPI-U, the Consumer Price Index for All Urban Consumers — rose at unexpectedly high rates in March and April, well above consensus forecasts. And it looks like this could continue for several months. The result: Inflation is suddenly a very hot topic. And that actually is worrisome, because when workers begin “accepting” that future inflation will be high … wages will rise and accelerate the trend.

Google emails me a daily search alert for “Treasury Inflation-Protected Securities,” and most days in the past there would be no email at all, or an email with one or two slightly-related stories. Now, that list is booming to 12 to 15 stories a day.

So let’s take a look at what media are saying about inflation.

Wall Street Journal, May 23

The stakes are high for investors. Inflation dents the value of traditional government and corporate bonds because it reduces the purchasing power of their fixed interest payments. But it can also hurt stocks, analysts say, by pushing up interest rates and increasing input costs for companies. …

As of Friday, the yield on 10-year TIPS was minus 0.826%—meaning investors would lose money absent any inflation—compared with 1.629% for the nominal 10-year Treasury note. That means CPI growth would need to average at least 2.45% over the next 10 years for the inflation-protected security to pay as much or more than the nominal Treasury.

To some, this makes TIPS the safest and best inflation hedge. Investors are nearly guaranteed to get their principal back if they hold the bonds to maturity. At current yield differentials, they can earn significantly more than regular Treasurys if inflation fears are realized.

Still, TIPS returns are likely to be paltry under almost any scenario, particularly if inflation comes below expectations.

Yahoo! Finance, May 21

About one in three U.S. adults say they’re spending more on groceries than they were at the start of 2021, according to a Morning Consult survey of 2,200 U.S. adults conducted May 17 to 19 for Bloomberg News. Red meat was the ingredient cited most often for its higher prices, with chicken right behind.

CNBC, May 21

“In general, inflation is usually negative for stocks,” said Amy Arnott, a portfolio strategist at Morningstar. She pointed to history as proof: Between 1973 and 1981, inflation rose by more than 9% a year. During the same period, stocks shed about 4% annually. …

Another good match for investors worried about inflation are Treasury Inflation Protected Securities, or TIPS, said CFP Nicholas Scheibner, a wealth management advisor at Baron Financial Group in Fair Lawn, New Jersey. These securities carry a similar risk as other fixed income investments, he said, but they add an adjusted principal amount if inflation increases.

E-piphany by Michael Ashton, May 20

The Federal Reserve has recently started to use the word “transitory” when describing inflation pressures in the U.S. economy. What they’re trying to indicate is that we shouldn’t worry, the pressures we are seeing right now will eventually pass. But that’s stupid. All inflation is transitory. …

Maybe what they mean is that “these price changes we are seeing are all the results of supply and demand imbalances in nominal space, so they’ll all reach equilibrium and inflation will go away.” If that’s so, then (a) they’re probably wrong, (b) that’s what inflation looks like anyway; it doesn’t manifest as smooth price changes across all goods at the same time, and (c) you still haven’t told me over what period it will take for this equilibrium to occur.

New York Times, May 20

It is too soon to show up clearly in the data, but there are anecdotes aplenty that companies are rapidly increasing pay. Just this week, Bank of America said it would start a $25-per-hour minimum wage by 2025, up from $20, and major chains like McDonald’s, Starbucks and Chipotle have announced significant moves toward higher pay in recent weeks.

Associated Press, May 20

Many economists, as well as the Federal Reserve, say not to worry about any of this. They’re convinced these fast price gains will prove fleeting. If the experts are wrong, however — remember last month’s jobs data, where economists’ predictions were wildly off the mark? — it could ravage the economy and force the Fed to reverse its record-low interest rate policy and trim the bond purchases that are boosting markets. … (B)e prepared to experience even more swings in the stock market as Wall Street’s biggest question waits even longer to be answered.

Barron’s, May 17

For business owners and consumers on the ground, official inflation data and policy makers’ commentary are an alternate reality. Inflation is here, say grocery shoppers, home buyers, manufacturers, and retailers who insist that their dollars are buying less. …

The gap between reported price inflation and the experiences of businesses and consumers is a signal to investors that inflation is hotter than it looks. Implications of the disconnect are vast, affecting Social Security payments, tax-bracket adjustments, and economic growth calculations, in addition to investment returns, inflation expectations, and interest rates.

“All you have to do is open up your eyes to see there is inflation pressure everywhere,” says Ed Yardeni, president of Yardeni Research. “We are in stimulus shock.”

MarketWatch, May 12

The Fed has been hit by two major data surprises. Last Friday’s weaker-than-expected April job report and Wednesday’s hotter-than-expected April consumer prices. …

As the economy reopens, “we could have more persistent imbalances between aggregate demand and supply that would put more persistent upward pressure on inflation than we and outside forecasts expect,” (Federal Reserve Vice Chairman Richard) Clarida said Wednesday after the inflation data was published.

“I expect inflation to return to – or perhaps run somewhat above – our 2% longer-run goal in 2022 and 2023,” he said.

Final thoughts

I was at a dinner party recently (with fully vaccinated friends) and the topic turned to cooking and shopping in general. I asked the group: “Do you think prices are rising much faster right now?” The immediate reaction was a loud “YES,” across the board, with people giving examples of the price of onions, meat, lumber, used cars, housing.

Consumers have been noticing higher inflation for months. In May, the U.S. media also noticed. The overall effect is that “inflation consciousness” is seeping into the U.S. economy. This trend will continue for several months, but could dwindle later in the year. Or not. We’ll see.

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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 purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

Posted in Inflation | 11 Comments

Reopened 10-year TIPS gets a real yield to maturity of -0.805%, a bit higher than expected

Posted on May 20, 2021 by Tipswatch

By David Enna, Tipswatch.com

The U.S. Treasury’s reopening auction of a 10-year Treasury Inflation-Protected Security — CUSIP 91282CBF7 — generated a real yield to maturity of -0.805%, a bit higher than was indicated by open-market trading in this TIPS.

This is a 9-year, 8-month TIPS and it carries a coupon rate of 0.125%, which was set by the originating auction on Jan. 21, 2021. And while an after-inflation yield of -0.805% is very low by historical standards for a TIPS of this term, it was still above the record low of -0.987% set at the January auction.

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 (or below) inflation.

The negative real yield does not mean that this TIPS will have a negative nominal return. But it does mean it will have a return that lags official U.S. inflation by 0.805% over the next 9 years, 8 months.

Because the real yield was well below the coupon rate of 0.125% (the lowest the Treasury allows for a TIPS) investors at today’s auction had to pay a sizable premium for this TIPS, an adjusted price of about $111.149 for about $102.13 of value, after accrued inflation and interest is added in. This TIPS will have an inflation index of 1.0166 on the settlement date of May 28.

So, in other words, an investor who put $10,000 into this TIPS will have paid about $11,115 for $10,213 in value, and will earn an annual coupon rate of 0.125% along with inflation accruals that match U.S. inflation for 9 years, 8 months.

CUSIP 91282CBF7 trades on the secondary market, and had been trading with a real yield in a range of -0.84% to -0.85% right up to the auction’s close at 1 p.m. EDT. Because the real yield came in a bit higher at -0.805%, this indicates less-than-strong demand for this reopened TIPS. On the other hand, the bid-to-cover ratio was 2.5%, indicating decent demand.

Here is a chart showing the history of 10-year real yields over the last two years, showing the dramatic bump higher in mid-March 2020, when COVID-19 fears caused a market panic, and then the dramatic fall after the Federal Reserve stepped in with its bond-buying programs, which continue today:

Inflation breakeven rate

With a 10-year nominal Treasury trading with a yield of 1.63% at the auction’s close, this TIPS gets an inflation breakeven rate of 2.44%, high by historical standards. (You have to go back to 2013 to find inflation expectations higher than 2.5%.) This means that the reopened TIPS will out-perform a nominal 10-year Treasury if inflation averages higher than 2.44% over the next 9 years, 8 months. Think it will be higher? Buy a TIPS. Think it will be lower? Buy a nominal Treasury.

Before the auction, the trendline looked like the inflation breakeven rate would break the 2.5% barrier today. But investors backed off. From a Reuters report today:

Market expectations of a further rise in inflation would need evidence of the economy moving past full employment very, very rapidly, said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA LLC.

“We’ve probably already reached the peak level of economic activity, and that probably happened in March and April,” Ricchiuto said.

If you don’t “reach full peak employment very, very quickly, then you have to rethink, reset your overall expectations on the market,” he said.

Here is the trend in the 10-year inflation breakeven rate over the last two years, showing the remarkable surge higher since the Federal Reserve and Congress began aggressive stimulus programs in March 2020:

Reaction to the auction

The TIP ETF, which holds the full range of maturities of TIPS, was trading slightly higher all morning, but its price fell immediately after the auction’s close at 1 p.m. EDT. This is another indication of weak demand for the reopening auction.

Overall, however, this auction result looks like was in the range of “predictable.” The Treasury was adding $13 billion in new supply, and bidders wanted a slightly higher-than-market yield.

The auction closes the history of CUSIP 91282CBF7, with three auctions that all produced real yields deeply negative to inflation. The Treasury will offer a new 10-year TIPS at auction in July and then reopen that issue in auctions in September and November.

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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 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 | Leave a comment

10-year TIPS will reopen at auction Thursday: Is it worth a look?

Posted on May 16, 2021 by Tipswatch

By David Enna, Tipswatch.com

This is a great time to be a holder of Treasury Inflation-Protected Securities, because probably all of your longer-term holdings are more valuable today than when you purchased them. The TIP ETF, which holds the full range of maturities, had a total return of 8.4% in 2019 and then 10.8% in 2020.

That’s the good news. The bad news is that it’s not a great time to be a buyer of TIPS. Real yields — your returns against inflation — have plummeted in 2021 and once again the full range of TIPS offerings, including the 30-year, have a real yields negative to inflation.

Of course, this is the world of safe fixed-income investing in May 2021. All safe investments, including nominal Treasurys, bank CDs and TIPS, are highly likely to under-perform official U.S. inflation into the future. The only exceptions are U.S. Savings Bonds: The I Bond will have a return matching official inflation, and the EE Bond will return 3.5% if held for 20 years, and has a good shot at beating future inflation. (Compare that with the 20-year Treasury, yielding 2.25%.)

Into this environment comes Thursday’s reopening auction of CUSIP 91282CBF7, creating a 9-year, 8-month TIPS. This is its second and final reopening auction.

  • CUSIP 91282CBF7 was created at auction on Jan. 21, 2021, and generated a real yield to maturity of -0.987%, the lowest ever for any TIPS auction of this term. The coupon rate was set at 0.125%, and investors paid a premium price of about $111.64 for about $100.01 of par value plus accrued interest.
  • It was then reopened on March 18, 2021, with a more-favorable real yield to maturity of -0.580%. The price dropped to about $107.62 for about $100.73 of value, after accrued inflation and interest was added in.

CUSIP 91282CBF7 is currently trading on the secondary market, and you can track its real yield and price on Bloomberg’s Current Yields page. As of Friday’s close it was trading with a real yield of -0.92% and a price of about $110.58. So at this point the real yield still remains a bit higher than January’s record low.

This TIPS will carry an inflation index of 1.01660 on the settlement date of May 28. That’s going to raise its adjusted price by 1.66%, but investors will get a matching amount of additional principal.

Here is a look at the trend in 10-year real yields over the last decade, a period of extremely low interest rates and relatively mild inflation:

For much of the time over the last decade, the 10-year real yield has been above zero and often in a range near 0.50%. The two exceptions are times of aggressive quantitative easing by the Federal Reserve, first from 2011 to mid 2014, and again from 2020 to today. Real yields are likely to remain well below zero at least until the Fed “hints” it will taper its bond-buying programs and eventually — after much signaling — begin raising short-term interest rates.

In the meantime, the Fed has stated it will accept “average” U.S. inflation of higher than 2%. So even though U.S. inflation is currently running at 4.2%, the Fed will ignore that until average inflation — maybe over 18 months? — rises “above 2%,” implying that 2.5% will be acceptable. The market’s reaction has been to force real yields lower, even as nominal yields were increasing. Because TIPS offer inflation protection, they are a more appealing investment under this Fed policy, so they are being bid up, forcing yields lower.

Here is a comparison of the nominal yield of a 10-year Treasury note versus the real yield of a 10-year TIPS over the last decade:

The key point is to note that while the two yields tend to rise and fall together, after February 2020 they have sharply diverted, with the nominal yield rising while the real yield is falling. And that brings us to …

10-year inflation breakeven rate

A nominal 10-year Treasury is currently trading at 1.63%, and if this reopened TIPS gets a real yield of -0.92%, it will have an inflation breakeven rate of 2.55%, which would be higher than any auction result since 2016 (when I started tracking this measure). In essence, it means that inflation will have to average more than 2.55% over the next 9 years, 8 months, for this TIPS to out-perform a nominal Treasury.

I think there will be plenty of investors willing to bet that inflation will run higher than 2.55% over the next decade, and so demand for this offering should be strong, at least versus a nominal 10-year Treasury.

Here’s a look at the trend for the 10-year inflation breakeven rate over the last decade, showing the rather mind-boggling surge higher once the Federal Reserve and Congress went into “stimulus” mode in March 2020:

When you compare a TIPS to a nominal Treasury, a TIPS is more attractive as the inflation breakeven rate declines, and less attractive as the inflation breakeven rate rises. Check out my “TIPS Vs. Nominals” page for more on that.

Conclusion

Once again, my personal investment decision is to sit out this auction, with the real yield likely to be close to a record low, the breakeven rate historically high, and the investment requiring a lofty premium price over par. At some point, nominal and real yields will climb higher, and more attractive options — eventually — will be available.

For the first $10,000 you invest in inflation protection, go with Series I Savings Bonds, which have a purchase cap of $10,000 per person per year. Right now an I Bond has 92-basis-point advantage over this TIPS, while providing tax-deferred interest and better inflation protection.

If you are interested in this auction, keep an eye on Bloomberg’s Current Yields page up to the morning of the auction, which closes to non-competitive bids at noon EDT. The 10-year TIPS listed there is CUSIP 91282CBF7, and it should be an accurate predictor of your likely yield and cost. But just be aware that an auction event can sometimes skew the yield higher or lower. As I noted, I think demand could be fairly strong for this TIPS from big-money investors.

One positive factor: April’s non-seasonally adjusted inflation rate of 0.82% is going to give an immediate boost to this TIPS’ principal balance in June, up 0.82%. And adjustments in the next few months after that could also be fairly high.

I will be posting the auction results soon after the official close at 1 p.m. EDT Thursday. Here is a history of recent 9- to 10-year TIPS auctions, showing the string of negative real yields that began in May 2020:

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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 purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

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