Up Next: A New 10-Year TIPS Will Auction Jan. 21

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Includes: IEI, TIP
by: Tipswatch

Summary

With the stock market in turmoil, the yield on this TIPS offering is likely to be volatile.

At the close Friday, the Treasury estimated a 10-year TIPS would have a yield of 0.67%.

That would have been the highest yield – but just slightly – for any 9- to 10-year TIPS since July 2011.

This is CUSIP 912828N71 and you can read the Treasury announcement here. It's a new 10-year Treasury Inflation-Protected Security, and that means the both the yield to maturity (after inflation) and the coupon rate will be set by the auction.

With the stock market in turmoil so far in January, the yield on this TIPS offering is likely to be volatile. TIPS usually benefit from a flight to safety during a stock market downdraft, but that hasn't been happening so far in 2016. Over the last five trading days, the TIP ETF has slightly lost value, while intermediate Treasuries (IEI, shown in red on the graph below) has gained 0.76%.

TIP vs. IEI

It's hard to predict if this trend will continue. Here is what we know at the close of markets on Friday, Jan. 15:

  • The best yield predictor for a new-issue TIPS is the Treasury's Real Yield Curve Rates page, which estimates yields for full-term TIPS. At the close Friday, the Treasury estimated a 10-year TIPS would yield 0.67%, down just 2 basis points from where it opened the year.
  • Bloomberg's Current Yields page shows real-time numbers for the longest-term 10-year TIPS currently trading on the secondary market. Right now its yield stands at 0.64% - but this TIPS matures in July 2025, six months earlier than next week's new issue. So its yield should be slightly lower.
  • You can also look at the Wall Street Journal's Closing Prices page and see that the TIPS maturing in July 2025 closed unchanged today with a yield of 0.628%.

So if the auction had been held today, this new 10-year TIPS probably would have yielded about 0.670%, generating a coupon rate of 0.625%. That would have been the highest yield - but just slightly - for any 9- to 10-year TIPS since July 2011.

I am especially interested in this auction because I have a TIPS - 912828ET3 - maturing Jan. 15. This was a sweetie, with a coupon rate of 2.0% and a yield of 2.025% after inflation. Inflation was a tame 19.7% over the last 10 years, but I still got about 4% annualized on that investment. (However, a nominal 10-year Treasury was yielding about 4.35% in January 2006, so it would have been the better investment.)

I have other TIPS maturing in April and July this year. At least interest rates appear to be heading higher, if haltingly. A big stock market decline could put an end to that, however.

Conclusion. I would be likely to buy this new TIPS if the yield appears to be climbing above 0.70%.

Here's a chart of all 9- to 10-year TIPS auctions since January 2009, showing the wide variations in yield, from a high of 2.245% in January 2009 to a low of -0.750% in September 2012. It's been an amazing seven years.

10-year TIPS auctions

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.