Up Next: A New 5-Year TIPS Will Auction On April 21 - Is It Worth A Look?

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Includes: IPE, LTPZ, SCHP, SIPE, STIP, STPZ, TDTF, TDTT, TIP, TIPX, TIPZ, TPS, VTIP
by: Tipswatch

Summary

CUSIP 912828Q60 looks likely to end up with a negative real yield.

Yields for this term of TIPS are down an amazing 68 basis points since December.

Even a US Savings I Bond with a fixed rate of 0.1% would outperform this TIPS.

The U.S. Treasury announced this morning that it will auction a new 5-year Treasury Inflation-Protected Security - CUSIP 912828Q60 - on April 21. Both the coupon rate and real yield to maturity will be set at the auction.

This is an intriguing auction - but not in a positive way - because market yields on 4- to 5-year TIPS have again fallen below zero, meaning they are guaranteed to underperform inflation over the next five years.

As of today, the Treasury is estimating on its Real Yield Curves page that a full-term 5-year TIPS would yield -0.21%.

This is down an amazing 68 basis points since the last auction of this term, in December 2015, when CUSIP 912828K33 went off with a real yield to maturity of 0.472%. You can take a look at Bloomberg's Current Yields page and see that this TIPS - which has 4 years remaining in its term - is now yielding -0.31%.

I would argue that investing in a US Savings I Bond with a fixed rate of 0.1% - available through April 30 - is easily the better investment. Do the math: 0.1% above inflation beats 0.31% below inflation.

Inflation breakeven rate. A nominal 5-year Treasury is yielding about 1.22% today, creating an inflation breakeven rate of 1.43% for a 5-year TIPS, which is low but up substantially from the 0.93% it reached on Feb. 9. Since then, inflation has "perked up" a bit with rising gasoline prices. See my article: "Inflation Protection Is Getting More Expensive - Is It Worth It?"

So buyers of this new 5-year TIPS will be facing a double whammy: Sharply declining real yields, while at the same time rising inflation breakeven rate, making the TIPS more expensive versus a traditional Treasury.

Although I love the flexibility of a 5-year TIPS, I'd have to say there are better options out there today, including I Bonds, which can be sold after 5 years with no penalty, or bank CDs, which are paying up to 2.0% over 5 years, if you shop around.

Here is the history of all 4- to 5-year TIPS auctions since 2007:

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