The U.S. Treasury just announced that its auction of a new 10-year Treasury Inflation-Protected Security resulted in a real yield to maturity of 0.045%, the lowest yield in more than three years of auctions.
CUSIP 912828S50 gets a coupon rate of 0.125%, the lowest the Treasury will go. And that means investors at today's auction had to pay a premium - an adjusted price of about $100.98 for $100 of par value. The adjusted price includes an inflation adjustment to principal of about 18 cents per $100 on the settlement day of July 29, when the inflation index will be 1.00184.
The real yield - which means the yield above inflation - of 0.045% was the lowest for any 9- to 10-year TIPS auction since May 2013. There have been 19 auctions of this term since then.
The Treasury had estimated Wednesday that a full-term 10-year TIPS would yield 0.130%, and the TIP ETF had been trading slightly down Thursday morning, indicating slightly higher yields. The auction result of 0.045% ran counter to those numbers, indicating buyer demand must have been strong.
Why would a TIPS barely beating inflation draw strong buyer demand?
Inflation breakeven rate. One reason TIPS remain a popular investment is that even at a time of very low nominal yields, buyers can be assured with a TIPS of at least keeping pace with inflation. With the 10-year nominal Treasury trading at 1.59%, this TIPS gets an inflation breakeven rate of about 1.54%. That means if inflation averages more than 1.54% over the next 10 years, the TIPS will outperform a nominal Treasury.
Core inflation has increased 2.3% over the last 12 months, which indicates we could be entering a time of slightly higher inflation. TIPS are a good way to protect against that risk. A breakeven rate of 1.54% remains very low historically, as shown in this chart of rates since the deep recession ended in 2009:
While I didn't find today's auction attractive, it's obvious that big money investors found the safety of TIPS attractive. Reuters called the demand 'solid' and pointed out:
The ratio of bids to the amount of 10-year TIPS offered was 2.39, up from 2.27 at the prior auction in May and the highest since March 2015.
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