10-Year TIPS Reopening Generates Attractive Real Yield Of 0.910%

Sep. 20, 2018 2:06 PM ET2 Comments
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  • The real yield of 0.910% was the second highest of this term through 43 auctions since May 2011.
  • The inflation breakeven rate came in at 2.15%, on the higher end of recent auctions, but still acceptably in the "neutral zone."
  • Investors got an attractive yield, a good coupon rate of 0.750%, and a decent price versus nominal Treasurys.

The U.S. Treasury's auction today of $11 billion in a reopened 10-year TIPS generated a real yield to maturity of 0.910%, the second highest yield for this term at auction since 2011.

This is CUSIP 912828Y38, a Treasury Inflation-Protected Security that was first auctioned on July 19 with a real yield of 0.762% and a coupon rate of 0.750%. It has a remaining term of 9 years, 10 months.

Because today's auction generated an after-inflation yield higher than the coupon rate of 0.750%, investors got it at a discount. The adjusted price was about $98.89 for about $100.39 of principal, after accrued inflation is added in. The real yield of 0.910% was a bit below the 0.938% generated at a May 17 reopening, but otherwise it was the highest of 43 auctions of this term since May 2011.

Real yields (meaning the yield above inflation) have been rising steadily over the last 12 months, as shown in this one-year chart for the 10-year real yield:

Real yield trendInflation breakeven rate

With a 10-year nominal Treasury trading today with a yield of 3.06%, this reopened TIPS gets a 10-year inflation breakeven rate of 2.15%, on the higher end of recent auctions. Essentially, that rate means this TIPS will outperform a nominal Treasury if inflation averages higher than 2.16% over the next 10 years. Although U.S. inflation is currently running at 2.7%, investors are betting that it will stabilize at a lower rate in future years.

At this point, the inflation breakeven rate is in the "neutral zone," meaning that TIPS yields are fairly balanced against nominal yields. Here is the one-year trend in the 10-year inflation breakeven rate, showing a dramatic surge higher early in 2018, but a stabilizing trend since then:

Inflation breakeven rateReaction to the auction


For investors, today's auction offered an

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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