Treasury Inflation-Protected Securities

• There have been 104 auctions of this 9- to 10-year term since 1997 and today’s result was a record low yield, by a large margin.
• The inflation breakeven rate came in at 1.52%, a reasonable number but higher than recent trends. Inflation expectations are slowly rising.
• Reaction to the auction looked mixed, with TIPS yields rising slightly after the auction’s close at 1 p.m. EDT.

The U.S. Treasury just completed its auction of $14 billion in a new 10-year Treasury Inflation-Protected Security, with a historic result: A real yield to maturity of -0.93%, the lowest in the 23-year history of TIPS auctions of this term.

This is CUSIP 912828ZZ6, and it got a coupon rate of 0.125%, the lowest the Treasury will allow for a TIPS. That means investors at today’s auction had to pay a huge premium for this TIPS: an adjusted price of about $111.03 for about $100.01 of value, after accrued inflation and interest are added in.

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• The real yield for CUSIP 912828ZZ6 could end up around -0.82%, the lowest in the 23-year history of TIPS auctions of this term.
• Fears of future inflation – spurred by massive monetary and fiscal stimulus programs – should attract investors.
• The inflation breakeven rate will be around 1.46%, a reasonable number. But if the inflation hawks are right that 1.46% number will look very attractive.

Here’s the question: Would you prefer a 10-year TIPS yielding 0.82% less than inflation or a 10-year Treasury note with a nominal yield of 0.64%? And how will these investments perform under a scenario of possible rising inflation?

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• Both all-items inflation and core inflation rose faster in June than the consensus estimates.
• Will any of this alter the Federal Reserve’s commitment to ultra-low interest rates? No.
• The June inflation report offers a glimmer of hope for a small increase in the Social Security COLA in 2021.

• The Social Security Administration uses an esoteric inflation index and only three months of data to determine the COLA.
• As of the May inflation report, the COLA would be set to zero. But May’s number is pretty much irrelevant to the final calculation.
• Should we expect inflation or deflation in coming months? Most experts expect deep deflation, but could mild inflation sneak into the picture?

You might think the Social Security Administration’s annual cost-of-living adjustment for Social Security benefits is based some sort of index that accurately reflects “official U.S. inflation.” That would be wrong.

You might also think the SSA’s COLA is based on some sort of 12-month year-over-year calculation of annual inflation. That would be wrong, too.

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