Defying The Naysayers: 5-Year TIPS Reopening Auctions With A Real Yield Of 0.12%

Dec. 22, 2016 2:13 PM ETiShares TIPS Bond ETF (TIP)1 Comment
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  • A bear market for Treasury Inflation-Protected Securities? Not based on this auction, which generated strong demand.
  • The yield to maturity of 0.12% fell just below the coupon rate of 0.125%, meaning buyers had to pay a small premium for this TIPS.
  • TIPS have been out-performing the overall bond and Treasury markets over the last week. Inflation protection is still 'in'.

The U.S. Treasury just announced that its reopening auction of CUSIP 912828Q60 - creating a 4-year, 4-month Treasury Inflation-Protected Security - resulted in a real yield of 0.12%, a bit lower than looked likely in recent days.

Over the weekend, when I previewed this auction, the real yield (above inflation) looked like it could come in around 0.23%. You wouldn't know it from the 'Treasury market is crashing' coverage you see everywhere these days, but the TIPS market has had a nice rally in the last week. The NYSEARCA:TIP ETF is up about 0.75% since last Friday, and TIPS are outperforming the overall bond market and overall Treasury market:

Bear market for TIPS? Really? All of this indicates continued strong demand for inflation protection among investors.

In today's auction, the real yield came in just below the coupon rate of 0.125%, so buyers paid a unadjusted price of $100.02 for $100 of value. When you add in accrued inflation of nearly 2% since the original auction in April, you get an adjusted price of $102.01 for about $101.98 of principal.

Inflation breakeven rate. With a 5-year nominal Treasury trading at about 2.03%, this TIPS gets an inflation breakeven rate of 1.83%, meaning that it will outperform a nominal Treasury if inflation averages above 1.83% over the next 4-year, 4 months. This is well above the 1.53% generated at the originating auction in April. Inflation expectations have risen sharply in the last half of 2016, as shown in this six-year history of the 5-year TIPS breakeven rate:

Reaction to the auction. The TIP ETF has been trading sharply higher after the auction close at 1 p.m., as shown in the chart. This is a very strong reaction, with a higher price indicating declining real yields for TIPS. In fact, according to Bloomberg's

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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.

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