10-Year TIPS Reopening Auctions With A Real Yield Of 0.512%

Nov. 16, 2017 1:56 PM ETTIP1 Comment
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  • The after-inflation yield was the highest at auction for this term since January 2016, breaking a string of 10 auctions under 0.50%.
  • The inflation breakeven rate came in at 1.84%, a reasonable number but well off the lows of early summer.
  • Market reaction to the auction has been muted, with the TIP ETF barely budging after the 1 p.m. auction close.

The Treasury just announced that is reopening of CUSIP 9128282L3 - creating a 9-year, 8-month Treasury Inflation-Protected Security - auctioned with a real yield of 0.512%, the highest auction yield for this term since January 2016.

The after-inflation yield came in a bit higher than where this TIPS was trading on the secondary market at mid-morning, when the yield was steady at 0.48%. After the 1 p.m. close, the TIP ETF dipped a bit, indicating a negative reaction, but then quickly recovered.

CUSIP 9128282L3 first auctioned on July 20, 2017, with a coupon rate of 0.375%. That means investors at today's auction got it at a discount, about $99.58 for $100.88 of principal, when accrued inflation is added in.

So today's auction was a pleasant surprise for investors. A real yield of 0.512% broke a string of 10 TIPS auctions in the 9- to 10-year term with a yield under 0.50%. Here is the real yield trend over the last four years, with the 0.50% level marked in red:

10-year TIPS yieldsInflation breakeven rate. With a nominal 10-year Treasury trading with a yield of 2.35%, this TIPS gets an inflation breakeven rate of 1.84%, meaning it will outperform a nominal Treasury if inflation averages higher than 1.84% over the next 10 years. That seems like a reasonable bet, but inflation breakevens have been climbing since reaching a low of 1.66% on June 21, 2017. That means the market is pricing in higher inflation, even as interest rate gradually rise. Here's the one-year trend in the 10-year inflation breakeven rate:

10-year breakevensTIPS remain a reasonable investment when compared with a nominal Treasury, because they provide inflation protection with just a small risk of under-performance. If inflation rises strongly, the return on a TIPS will rise to match inflation.

Today's auction closes out the history

This article was written by

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I am no longer writing for this site. More details. I will continue to post updates at my site, TipsWatch.com.-----David 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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