The US Treasury just announced that its reopening of CUSIP 912828K33 resulted in a real yield to maturity (after inflation) of 0.305%. This creates a 4-year, 8-month Treasury Inflation-Protected Security.
Because this TIPS has an already-established coupon rate of 0.125%, investors today got it at a discount – an adjusted price of $99.17 per $100 of par value. However, because this TIPS carries about 1.9% of inflation appreciation since April, its adjusted price rises to $101.05 for about $101.90 of adjusted value.
The real yield of 0.305% was a huge jump – 64 basis points – over the April 23 original auction for this TIPS, which resulted in a yield of -0.335%. Today’s result was the second-highest yield in the last 14 4- to 5-year TIPS auctions, dating back to October 2010.
Short-term interest rates have been rising recently as the market adjusts to expected short-term rate increases from the Federal Reserve. It’s interesting to note that a 10-year TIPS is trading around 0.50% today, less than 20 basis points higher than a 5-year.
Inflation breakeven rate. With the nominal 5-year Treasury trading today at 1.47%, this sets up a ‘5-year’ inflation breakeven rate of 1.16%. That is remarkably low and indicates that the market expects continued very weak inflation. It also makes this TIPS very cheap against a nominal Treasury. Here is the trend for the 5-year breakeven over the last five years:
Reaction to the auction. The TIP ETF had been trading down (slightly) all morning but took a very large move up after the auction closed, indicating declining yields. In fact, Bloomberg’s Current Yields page is showing this same TIPS currently trading at 0.27%, lower than the auction yield.
That’s a pretty strong statement in reaction to the auction, but what’s the message? Not sure, but I would say this auction was quite friendly to today’s buyers.
Reuters’ Richard Leong noted very strong demand for this 5-year TIPS reopening, which set a record high of 76.36% sales to indirect bidders, such as fund managers and foreign central banks.
TD Securities interest rate strategist Gennadiy Goldberg assigned an “A+” grade to the TIPS auction in a note, “suggesting that the recent selloff managed to attract some end-user demand.”
Checking in on today’s 5-year TIPS reopening
Let’s take a quick look at today’s auction of CUSIP 912828K33, creating a 4-year, 8-month Treasury Inflation-Protected security. This TIPS – originally issued in April – carries a coupon rate of 0.125%.
Because this TIPS currently trades in the secondary market, we can get a decent idea of its market value today, as of 10 a.m.:
- The Wall Street Journal’s Closing Prices page shows it ended Wednesday with a real yield to maturity of 0.248% and a price of about $99.44 per $100 of current value.
- The real time quote this morning from Bloomberg’s Government Bonds page shows it yielding 0.30% and a price of $99.17.
- The Treasury’s Real Yields Curve page estimates that a full-term 5-year TIPS would yield 0.33%. (A full-term TIPS should yield slightly higher than a shorter-term issue.)
- The TIP ETF – which holds a broad range of maturities – is trading slightly lower this morning, indicating a slight increase in yields.
Whirl up this data and you get the idea this TIPS could go off with a real yield (after inflation) to maturity of somewhere around 0.30%. That’s 63 basis points higher than the -0.335% yield generated at the creation auction on April 27.
If your TIPS ladder could use a rung maturing in April 2020, I think this looks like a reasonable investment. It’s only a 4-year, 8-month commitment.
Keep in mind that this TIPS will have an index ratio of 1.01892 on Aug. 31, so investors will be buying about 1.9% of accrued principal at this auction. That will push the adjusted price higher.
Noncompetitive bids need to be placed by noon. I will be reporting on the results when the auction closes at 1 p.m.
US inflation rises 0.1% in July
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1% in July on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 0.2%.
I am at work today (yes, I have a job!) and can’t post a full analysis. But I have updated my Tracking Inflation and I Bonds page to reflect these new numbers.
Holders of TIPS and I Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust the principal balance of TIPS and set future interest rates for I Bonds. In July, the inflation index rose 0.01% – essentially unchanged – to 238.654, and is up 0.2% over the last 12 months.
The next I Bond interest rate adjustment will come November 1, based on non-seasonally adjusted CPI-U from March to September. With two months remaining in that period, inflation is up 1.07%, indicating a new annualized rate of
2.14%, but two months remain. With gas prices declining, that number could move lower.
Here is the 12-month inflation trend:
Up next: 5-year TIPS reopens at auction Aug. 20, 2015
The US Treasury will announce later this morning that it is reopening CUSIP 912828K33 at auction next Thursday, creating a 4-year, 8-month Treasury Inflation-Protected security with a coupon rate of 0.125%.
The real yield (after inflation) will be set at the auction, but here is what we can say right now about this TIPS, which trades on the secondary market:
- The Wall Street Journal’s Closing Prices page shows it ended Wednesday with a real yield to maturity of 0.147% and a price of about $99.91 per $100 of current value. But the listing also showed a very wide bid and asked spread of about 30 cents.
- The real time quote this morning from Bloomberg’s Government Bonds page shows it yielding 0.24%, a pretty wide spread from yesterday’s close. The price at that yield is down to $99.43.
- The Treasury’s Real Yields Curve page estimates that a full-term 5-year TIPS would yield 0.25%, more in line with the Bloomberg number.
NOTE: This TIPS will have an index ratio of 1.01892 on Aug. 31, so investors will be buying about 1.9% of accrued principal at this auction. That will push the adjusted price higher.
Yields on 5-year TIPS have been all over the map this year, starting the year at 0.31%, reaching a high of 0.34% as recently as Aug. 5, and a low of -0.37% on April 27, just a few days after this TIPS first auctioned with a miserable yield of -0.335%.
So … It’s possible that in just four months, the yield on this TIPS will have risen more than 60 basis points. And its cost will have dropped from $102.52 at the original auction to somewhere around $99.43.
It’s certainly a lot more attractive this time around.
Inflation breakeven rate. With the 5-year Treasury currently yielding about 1.56%, this sets up an inflation breakeven rate of 1.32% for this TIPS, meaning that it will outperform a 5-year nominal Treasury if inflation averages more than 1.32% over the next 5 years.
Although inflation has been running at 0.1% over the last 12 months, it has been climbing in recent months. This trend could be reversed by recently falling gasoline prices, but an inflation breakeven rate of 1.32% looks very attractive historically, as this chart shows:
Alternatives. The 5-year term sets up good comparisons with other ultra-safe investments. For example, this TIPS’ yield of 0.24% above inflation beats the current I Bond offering, which matches inflation. Another alternative is 5-year insured bank CDs. which are paying 2.25% right now at several banks. The 2.25% return sets up an inflation breakeven rate of 2.01% for this TIPS. If you don’t believe inflation will average higher than 2.01% over the next 5 years, the bank CD might be a better investment.
It will be interesting to watch where rates head in the next week. If you have need to park money for 4 years, 8 months, this TIPS could be an interesting investment.
Here is a chart of all 4- to 5-year TIPS auctions since 2007. Note that a yield of 0.24% would be the second highest for any 4- to 5-year TIPS since April 2010:
10-year TIPS auctions with a real yield of 0.491%
The Treasury just announced that a new 10-year Treasury Inflation-Protected Security auctioned today with a coupon rate of 0.375% and a real yield (after inflation) to maturity of 0.491%. This is CUSIP 912828XL9 and it matures July 15, 2025.
Because the auction yield dipped below 0.5%, the Treasury pegged the coupon rate on this TIPS to the next 1/8 percentage point below, explaining the 0.375% number. Therefore, investors bought it at a discount – an unadjusted price of $98.87 per $100 of par value. After an inflation index of 1.00262 is added in, the adjusted price rises to $99.13 for about $100.26 of adjusted value on the issue date of July 31.
Today’s yield was slightly lower than the market was indicating yesterday, but this was still the highest yield for any 9- to 10-year TIPS auction since November 2014.
Inflation-breakeven rate. A nominal 10-year Treasury is trading today with a yield of 2.29%, setting up an inflation-breakeven rate of 1.79%, which remains solidly in the ‘cheap’ range for a 10-year TIPS. This means if inflation averages more than 1.79% over the next 10 years, this TIPS will outperform a traditional Treasury.
Here is a chart of 10-year TIPS breakevens going back to May 2009:
Reaction to the auction. The TIP ETF – which holds a broad range of maturities – had been wobbling most of the morning, first down and then up slightly as the auction approached. After the auction close at 1 p.m. it continued trading slightly higher, indicating lower yields. Overall, the reaction is muted, indicating a well-received auction.