New 10-Year TIPS Will Auction July 20; Is It Worth A Look?

Summary

• This new TIPS could have the highest real yield since January 2016, but keep an eye on yield trends - they have been falling.
• The current inflation breakeven rate of 1.78% makes this TIPS attractive versus nominal Treasurys.
• A reason to celebrate? Possibly.

The U.S. Treasury on July 20 will auction $13 billion in a new 10-year Treasury Inflation-Protected Security, CUSIP 9128282L3. The coupon rate and the real yield (after inflation) to maturity will be determined by the auction.

I consider a new-issue 10-year TIPS to be the 'sweet spot' of TIPS investing. The 10-year term offers the best balance of yield and maturity. Ten years is a reasonable time for a buy-and-hold-to-maturity investment. And because it is a new issue, buyers will be paying very close to par value. At reopening auctions, the price investors pay is more unpredictable.

So here it comes: A new 10-year TIPS with a real yield that is likely to rise higher than the last seven 9- to 10-year TIPS auctions. A reason to celebrate? Possibly.

The 10-year TIPS real yield had been rising fairly steadily since hitting a 2017 low of 0.31% on February 24. Real yields reached a high of 0.66% on July 10, just two days before Federal Reserve Chair Janet Yellen told Congress that the Fed would be cautious in raising interest rates in the future. That prompted a buying spree in Treasurys, bringing the 10-year real yield down to 0.57% as of Friday. Still mildly attractive, but not quite as promising.

Here's how to watch the yield fluctuations this week in the days before the auction:

• The best data source for an originating auction is the Treasury's Real Yields Curve page, which shows daily estimates for full-term TIPS. As of Friday, as I noted above, the Treasury was estimating a real yield of 0.57% for a 10-year TIPS.
• You can find real-time quotes on Bloomberg's Current Yields page, but keep in mind that these quotes are for TIPS trading on the secondary market, with slightly shorter yields. On Friday, the yield was 0.55%, which makes sense for a term about six months less than a full 10 years.

I'm considering a purchase at this auction because I have a 10-year TIPS maturing this month and I'd like to reinvest the proceeds. I'd like to see yields rise back above 0.60% and would be distressed if they fall below 0.50%. So it will be an interesting week.

Inflation breakeven rate. With a 10-year nominal Treasury currently yielding 2.33%, a full-term 10-year TIPS at this point would have an inflation breakeven rate of 1.78%, which I consider attractive. Buyers of this TIPS are betting that inflation will average higher than 1.78% over the next 10 years. If it does, this TIPS will outperform a nominal Treasury.

While breakevens have risen off the very low levels of early 2016, they remain historically very low:

An auction yield above 0.50% would be the highest for any 9- to 10-year TIPS since January 2016, breaking a string of seven auctions below that level. For those who are waiting for 10-year yields to rise higher, this new TIPS will be reopened at auctions in September and November. Here's the history of all 9- to 10-year TIPS auctions since January 2011:

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