The Year's Most Attractive TIPS Auction Could Be Coming Dec. 21

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  • Short-term TIPS have attractive real yields, at least compared with longer maturities.
  • Watch out for volatility in the Treasury market next week in the days leading up to the auction.
  • The current inflation breakeven rate is about 1.81%, not cheap. This TIPS is fairly priced versus a nominal Treasury.

The U.S. Treasury announced today it will reopen CUSIP 912828X39 at auction on December 21, creating a 4-year, 4-month Treasury Inflation-Protected Security. Because of favorable trends in the short-term Treasury market, this could be the most attractive TIPS auction of 2017.

Of course, I am speaking of most attractive, 'relatively.'

The real yield curve has been flattening all year, and Wednesday's action by the Federal Reserve to raise its key short-term rate should continue that trend. With short-term rates rising, and longer-term rates declining, the yield curve is sending a strong message: Buy short-term.

Here is the 8-year trend line comparing real yields for 5-, 10- and 30-year TIPS. It's been rare to see the gaps narrow as much as they have today. The chart clearly shows how short-term rates are rising while longer terms are stable or dipping.

Yield SpreadThe chart below shows how the real yield on 5-year TIPS, currently 0.38% based on Treasury estimates, is just 10 basis points below the yield on a 10-year TIPS and 41 basis points below a 30-year. That is well below the average spreads over the last eight years of 0.52% and 1.17%, respectively.

TIPS yield spreadIn recent years, December has been an interesting month for Treasury yields - especially short-term yields - because the Federal Reserve has raised its key short-term interest rate in mid-December in 2015, 2016 and 2017. Those moves usually come one week before the last TIPS auction of the year, creating a 4-year, 4-month TIPS. Because of that, the December TIPS auction is often fairly attractive. I think that will be true again next week.

So let's take a look at CUSIP 912828X39, which originally auctioned on April 20, 2017, with a real yield to maturity of -0.049%. That's right, it had a negative real yield, which set its coupon rate at 0.125%, the lowest possible. It

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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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