Treasury Inflation-Protected Securities

• Price declines reflected the effects of COVID-19 shutdowns, with gas prices falling, along with prices of auto insurance, air travel, apparel and lodging away from home.
• Price increases hit more necessary items: Food, shelter, medical care and, alcohol.
• How long with this deflationary trend continue? If gasoline prices increase sharply in summer months, inflation could hold nearly flat.

• In its five-month auction history, CUSIP 912828Z37 showed remarkable volatility, with a swing of 115 basis points from March to May.
• Today’s real yield of -0.47% was the lowest at auction for any 9- to 10-year TIPS since March 2013.
• Negative real yields are the new normal and will continue as long as the Federal Reserve continues interventions into the bond market.

• The Treasury will reopen a 10-year TIPS at auction on Thursday, with the real yield to maturity expected to be well below zero.
• This TIPS — CUSIP 912828Z37 — had an amazing reopening auction in March, just as Treasury yields were surging.
• It’s not an attractive investment for small-scale investors, but the inflation breakeven rate of about 1.18% will make it appealing to big-money investors.

The U.S. Treasury will offer $12 billion in a reopened 10-year Treasury Inflation-Protected Security — CUSIP 912828Z37 — at auction Thursday, in an event that will reveal just how depressing the TIPS market has become.

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• The 20-year bond will re-launch Wednesday for the first time since 1986 at a regularly scheduled auction. The nominal yield should be about 1.05%.
• The Treasury will raise $20 billion in this auction, part of a massive borrowing effort this year, to fund COVID19 relief programs.
• The nominal yield of 1.05% is highly unattractive for small-scale investors. Series EE Savings Bonds offer equal safety at the same term with a massive yield advantage.

The U.S. Treasury will re-launch its 20-year bond in a historic auction Wednesday, offering $20 billion of this new issue, CUSIP 912810SR0. The 20-year bond has not been sold to the public regularly since 1986.

My reaction? This is a great idea for the Treasury. It’s also a lousy investment for small-scale investors. And there is a much, much better alternative available, also with a 20-year term, and just as safe.

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• Gasoline prices fell a remarkable 20.6% in April, setting off a deflationary surge across the economy.
• Core inflation fell to 1.4% year over year, breaking a 27-month streak of rates at or above 2.0%.
• Inflation-protected investments, especially TIPS, will suffer in this deflationary period.

In a stunning reflection of the current U.S. economy, the Bureau of Labor Statistics reported today that U.S. inflation fell 0.8% in April, the largest drop since December 2008, at the opening of the Great Recession. Year-over-year U.S. inflation has now plummeted to just 0.3%, down from 2.5% at the beginning of the year.

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