10-Year TIPS Reopens At Auction With A Real Yield Of 0.450%

Summary

• The after-inflation yield of 0.450% was 20 basis points higher than where 10-year TIPS were trading on September 8.
• Today's investors benefited from the Federal Reserve's announced intention Wednesday to unwind its bond portfolio and continue gradually increasing short-term rates.
• The inflation breakeven rate of 1.82% is in the mid-range of recent results, but continues to indicate muted inflation expectations.

The U.S. Treasury just announced that its reopening of CUSIP 9128282L3 - creating a 9-year, 10-month Treasury Inflation-Protected Security - auctioned with a real yield of 0.450%, in line with recent yields for auctions of this term.

The after-inflation yield was 11 basis points higher than where this TIPS was trading Friday on the secondary market, so buyers should be pleased. This TIPS originally auctioned on July 20 with a coupon rate of 0.375% and a real yield of 0.489%. Buyers at today's auction got it at a discount, about $99.35 for about $100.07 of value, when accrued inflation is added in.

The TIPS market got a bump in yield Wednesday when the Federal Reserve announced - yet again - that it intends to wind down its $4.5 trillion bond portfolio and is likely to raise short-term interest rates one more time in 2017.

So today's auction got a real yield in line with recent 9-10 year TIPS auction. Yields in the secondary market had risen higher earlier in 2017, and then dipped in recent weeks. Here's the 10-year real yield trend for 2017 (today's result isn't mapped in the chart, but is marked in red):

Inflation breakeven rate. With a nominal 10-year Treasury trading today with a yield of 2.27%, this TIPS gets an inflation breakeven rate of 1.82%, which is a bit below recent trends, but higher than where TIPS were trading in early summer. Inflation expectations remain fairly muted, as the Federal Reserve noted Wednesday in its statement:

On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined this year and are running below 2 percent. ... Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term ..."

Here is the 10-year inflation breakeven trend for the year:

Conclusion. I'd view this as a positive auction for today's investors. The after-inflation yield climbed back to 0.45% - it had been 20 basis points lower on September 8 - and buyers got this TIPS at a discount. Although the TIP ETF - which owns all maturities - has been trading down all day today, its price has barely budged after the auction close at 1 p.m., which indicates the auction went as expected.

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