10-Year TIPS Reopening Generates Real Yield Of 0.934%, Highest In 7 Years

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by: Tipswatch

Summary

This was the highest after-inflation yield for any 9-to-10 year TIPS auctioned since January 2011.

A yield of 0.934% above inflation is moving the return on a 10-year TIPS back into "more normal" levels after years of yield suppression.

The inflation breakeven rate was 2.18%, higher than any recent auction. Inflation expectations are rising.

The U.S. Treasury's reopening today of a 10-year TIPS generated a real yield of 0.934%, the highest for any 9- to 10-year auction since January 2011. There have been 44 auctions of this term over those 7-plus years.

This is CUSIP 9128283R9, which originally auctioned on January 18, 2018, with a real (after-inflation) yield to maturity of 0.548%, setting its coupon rate at 0.500%. Because today's auction resulted in a substantially higher yield, investors got this TIPS at a discount - about $97.13 for about $101.16 of value, after accrued inflation is added in.

Both nominal and real yields have been climbing sharply in recent months, as investors price in near-certain future interest rates moves by the Federal Reserve, combined with a surging federal deficit. Here is the trend for the 10-year real yield over the last two years:

10-year real yields

Today's after-inflation yield of 0.934% is the highest since a 10-year TIPS auctioned in January 2011 with a real yield of 1.17%. It is significant because it reflects a "more-normal" real yield after years of yield suppression through Federal Reserve policies. The first phase of quantitative easing launched in July 2011, and by January 2012, the 10-year yield had gone negative.

If the economy continues improving, both real and nominal yields should continue climbing, possibly as much as 50 basis points.

Inflation breakeven rate

With a nominal 10-year Treasury trading today at 3.11%, this TIPS gets an inflation breakeven rate of about 2.18%, the highest for any recent auction. That means this TIPS will outperform a nominal Treasury if inflation averages more than 2.18% over the next 9 years, 8 months. That seems like a reasonable assumption, but as recently as January 2016, 10-year inflation expectations had dropped to 1.3%. TIPS were an outstanding buy versus nominal Treasurys in early 2016, but are priced fairly today.

Here is the two-year trend in the 10-year inflation breakeven rate, showing the sharp rise since mid-2017:

Inflation breakeven

Today's auction yield of 0.934% was a bit higher than where this TIPS was trading on the secondary market Thursday morning, indicating that this auction might have received lukewarm investor support.

TIP ETF

Immediately after the auction's close at 1 p.m., the price of the TIP ETF took a fairly sharp move downward, which indicates higher yields. That would match with the impression that today's yield was a mild "upside" surprise. Investors at today's auction are pleased, I am sure.

This auction closes out the history of CUSIP 9128283R9, which could end being a groundbreaking issue. In a four-month time span, its yield climbed 38 basis points, reaching a level we haven't seen in more than seven years.

history

A new 10-year TIPS will be auctioned in July, with reopenings in September and November.

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