Treasury Inflation-Protected Securities

• Demand looked strong at this auction, with the real yield falling about 7 basis points from the secondary market’s yield earlier in the morning.
• The inflation breakeven rate came in at 1.10%, a reasonable number given our uncertain deflationary future.
• A 5-year TIPS is still a more attractive investment than a 5-year nominal Treasury note, currently yielding 0.33%. But there are alternatives.

The U.S. Treasury just announced that its reopening auction of a 5-year TIPS, CUSIP 912828ZJ2, resulted in a real yield to maturity of -0.766%, the lowest for this term at auction since April 2013.

The “real yield to maturity” indicates how this 4-year, 10-month Treasury Inflation-Protected Security will perform against official U.S. inflation. Investors at Thursday’s auction were willing to accept a return that will trail inflation by 0.766% over nearly five years.

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• The real yield looks likely to drop to about -0.65%, the lowest yield for any auction of this term since April 2013.
• The inflation breakeven rate is running at about 0.98%, up from recent lows but still attractive as an alternative to nominal Treasurys.
• Better alternatives? Clearly, the U.S. Series I Savings Bond is superior to a 5-year TIPS. Another choice would be to ride out this deflationary period in a 1-year bank CD.

Just when it seems we really need inflation protection, investments in inflation protection are looking awful. Or, more accurately, just when it seems like we need safe investments, safe investments are looking awful.

Welcome to June 2020 in our virus-stricken United States.

The U.S. Treasury on Thursday will offer $15 billion in a reopening auction of CUSIP 912828ZJ2, creating a 4-year, 10-month Treasury Inflation Protected Security. Depending on how you look at our nation’s near-term future, this offering is either enticing (for solid reasons) or total garbage (also for solid reasons). I’m leaning 75% toward garbage.

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• 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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