10-Year TIPS: Thursday's Reopening Is Another Attractive Auction

by: Tipswatch


The real (after-inflation) yield looks likely to climb above 0.80%, a seven-year high for TIPS of this term.

The inflation breakeven rate is climbing toward 2.15%, meaning this TIPS is not "cheap" versus a nominal Treasury. But it's not "expensive," either.

Think real yields will continue climbing? You'll have three more chances in 2018 to buy a TIPS of this term.

Looking for an attractive after-inflation yield priced at a discount? Check out the Treasury's May 17 auction that reopens CUSIP 9128283R9, offering $11 billion in a 9-year, 8-month Treasury Inflation-Protected Security.

This TIPS was originally auctioned on January 18 with a real yield to maturity of 0.548%, setting its coupon rate at 0.500%. It's now trading on the secondary market with a real yield of 0.81%, meaning it will go off at a nice discount in Thursday's auction.

If you're considering an investment, here's how to track the real yield in the days leading up to the auction:

  • The best data source for a reopening auction is Bloomberg's Current Yields page, which updates in real time. You can track CUSIP 9128283R9 by looking at the listing for GTII10:GOV, and as of Friday, it was trading with a real yield of 0.81% and a price of $97.11 for $100 of value.
  • You can also watch the Wall Street Journal's Closing Prices page, which updates each weekday after the market close at 4 p.m. EDT. As of Friday, it was showing this TIPS - which matures 2028 Jan. 15 - with a real yield of 0.806% and a price of about $97.16.
  • Also, you can watch the Treasury's Real Yield Curve page, which each weekday shows the Treasury's estimate of yield for a full-term TIPS. On Friday, a full-term 10-year TIPS was estimated to yield 0.82%. This page is useful for watching the day-to-day shifts in yield.

So, a few days before Thursday's reopening, this TIPS looks likely to generate a real yield higher than 0.80%, a bit better than the first reopening on March 22 that generated a real yield of 0.764%. Any yield above 0.80% would be the highest since a May 19, 2011, auction generated a yield of 0.887%.

That's significant because in July 2011 the Federal Reserve began a Quantitative Easing program that dramatically changed the market for nominal Treasurys and TIPS. By September 2011, a 10-year TIPS reopened at auction with a real yield of just 0.078%. By January 2012, the real yield had gone negative.

Now, after seven years, we appear to entering a period of "normalized" real yields, which is something to cheer about if you are an investor in TIPS. Here is the trend in the 10-year TIPS yield over the last seven years:

10-year real yield trend

Inflation breakeven rate

With a 10-year nominal Treasury currently yielding 2.97%, this TIPS if auctioned today would generate an inflation breakeven rate of 2.16%, 10 basis points higher than the 2.06% generated at the original auction in January. TIPS are getting more "expensive" versus nominal Treasurys, but at this point remain in the "neutral" range, neither expensive nor cheap. If this rate climbs above 2.25%, caution bells should start ringing, and nominal Treasurys might be worth a look.

Here is the seven-year trend in the breakeven rate, showing that the current rate has been rising rapidly, but remains below the QE-prompted inflation fears of 2011 to 2013:

10-year inflation breakeven trend

10-year TIPS versus I Bond

I Bonds purchased from May to October 2018 will carry a fixed rate of 0.3% until they mature or are sold. So that 0.3% is the "real yield" of an I Bond. Since this reopened, 10-year TIPS will carry a real yield of about 0.80%, isn't it a better investment than an I Bond? Yes, it is, if you hold both investments for 10 years.

However, a 50-basis-point spread between the yield of an I Bond and a 10-year TIPS is fairly normal and acceptable. Back in 2009 when Treasury yields were "normal," a spread of 100 basis points was common. I Bonds can be sold after five years with no penalty, offer tax-deferred income and have better protection against deflation.

It isn't an either/or decision: Invest in one, or both.

Yes or no on this 10-year TIPS reopening?

Seems like a no-brainer. Invest in this TIPS and you'll be getting a seven-year high in real yield, at a discount to par. However, I bought this TIPS at the March reopening, with a real yield of 0.764%, so I probably won't be buying it again this week.

Keep in mind that this TIPS will carry an inflation index of 1.01164 on the settlement date of May 31, meaning investors will pay an adjusted price about 1.1% above par and receive a matching amount of additional principal.

Also, the Treasury will offer a new 10-year TIPS at auction in July, with reopenings in September and November. If you think that real yields will be climbing, you might want to wait for those future auctions.

Here's the history of all TIPS auctions of this term dating back to 2011:

TIPS auctions

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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.