Treasury Inflation-Protected Securities

• After a strong run over the last 12 months, these short-term Treasury ETFs are now yielding very close to zero.
• There’s little upside potential and little yield benefit over Treasury money market funds, which lock in your share price at $1.
• Are these ETFs a risky investment? No, they are fine. But the reward-versus-risk equation doesn’t look appealing.

Over the last year, as short-term interest rates dropped dramatically, a lot of investors poured money into short-term Treasury ETFs as a way to capture a yield advantage over a money market account, while retaining safety.

Unfortunately, those days are over.

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• The real yield of -0.966% was slightly higher than where this TIPS was trading on the secondary market just minutes before the auction’s close.
• The inflation break-even rate settled in at 1.65%, which looks like a reasonable number. Inflation hawks should see this as a positive for this investment.
• This TIPS auction could be considered “normal” by the strange standards of normality in 2020.

The Treasury’s $12 billion reopening of CUSIP 912828ZZ6, creating a 9-year, 10-month Treasury Inflation-Protected Security, auctioned Thursday with a real yield to maturity of -0.966%, the lowest yield for any auction of this term.

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• The 10-year real yield has dipped deeply negative, to nearly 1% below inflation.
• But that reflects the bond market’s very low nominal yields. This TIPS’ inflation breakeven rate of about 1.67% is still appealing.
• For the first $10,000 you invest in inflation protection in 2020, the Series I Savings Bond is the better investment. Then consider TIPS.

The U.S. Treasury is reopening CUSIP 912828ZZ6 in an auction Thursday, offering $12 billion in this 9-year, 10 month Treasury Inflation-Protected Security. Even though terms of this TIPS are hardly dazzling, I’m expecting investor interest to be strong.

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• Both all-items inflation (at 0.4%) and core inflation (at 0.4%) were higher than consensus estimates, continuing a recent trend.
• The August inflation report is signaling a 1.2% increase in the Social Security COLA for 2021, but one more month of data remains.
• A recent surge in inflation has been good news for holders of TIPS and I Bonds, reversing the deflationary months of March and April.

U.S. inflation increased 0.4% in August on a seasonally adjusted basis, again surpassing consensus estimates and proving once more that inflation is a factor to be considered in investment strategies.

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