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

Apr. 21, 2016 2:00 PM ETTIP3 Comments
Tipswatch profile picture


  • 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
I am no longer writing for this site. More details. I will continue to post updates at my site, 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.

Recommended For You

Comments (3)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.