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:
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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