New 5-Year TIPS Auctions With A Negative Real Yield To Maturity, -0.195%

Apr. 21, 2016 2:00 PM ETTIP3 Comments
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Summary

  • CUSIP 912828Q60 will have a coupon rate of 0.125%.
  • Buyers had to pay about $101.63 for $100 of par value.
  • As recently as December, a similar auction had a real yield 66 basis points higher.

Although yields on shorter-term TIPS began climbing last year after the Federal Reserve's small uptick in interest rates, today's auction of a new 5-year Treasury Inflation-Protected Security brought back a dreaded sight from the recent past: Negative real returns.

The auction of CUSIP 912828Q60 went off with a coupon rate of 0.125% - the lowest the Treasury will allow - and a real yield to maturity of -0.195%. A negative number means this TIPS is guaranteed to underperform inflation over the next five years.

Just last December, a 4-year, 4-month TIPS auctioned with a real yield of 0.472%, about 66 basis points higher.

The combination of a 0.125% coupon rate and a negative real yield means buyers at today's auction had to pay up: about $101.63 for $100 of par value. That adjusted price also included an inflation index of 1.00038 on the settlement date of April 29.

For a small investor - one who doesn't run a hedge fund or a European Central Bank - a negative real yield makes a 5-year TIPS pretty undesirable. After all, you can buy a US Series I Savings Bond today paying 0.1% above inflation. That's a swing of 29 basis points.

Inflation break-even rate. A nominal 5-year Treasury is paying 1.34%, setting up an inflation break-even rate of 1.53% for this new TIPS. That means if inflation averages more than 1.53% over 5 years, it will outperform a nominal Treasury. I'd say that's a decent bet, and might appeal to a hedge fund or foreign central bank.

But inflation break-even rates have been inching up in recent weeks, making TIPS less of a 'steal' against nominals, as this chart shows:

Reaction to the auction.

Checking the TIP ETF in the minutes after the auction closes can give you a pretty good idea

This article was written by

Tipswatch profile picture
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I am no longer writing for this site. More details. I will continue to post updates at my site, TipsWatch.com.-----David Enna is a long-time journalist based in Charlotte, N.C. A past recipient of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website. The Tipswatch blog, which launched in April 2011, explores ideas, benefits and cautions about U.S. Series I Bonds and Treasury Inflation-Protected Securities, which David believes are an under-appreciated and under-used investments. David has been investing in TIPS and I Bonds since 1998.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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