This Week's New 30-Year TIPS Still Isn't A Winner

Feb. 17, 2019 12:21 PM ETTIP2 Comments
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  • 30-year real yields have been climbing, but remain below levels that would make them "interesting."
  • The 30-year inflation breakeven rate is currently trending at 1.9%, an attractive number but one that reflects the reality of stubbornly low inflation.
  • Conclusion: This is a risky investment.

The U.S. Treasury will auction $8 billion in a new 30-year Treasury Inflation-Protected Security, CUSIP 912810SG4, on Thursday. Should you take a serious look? Probably not.

I've noted often that I'm not a fan of 30-year TIPS, partly because my investing style is to buy and hold to maturity. When this TIPS matures on February 15, 2049, I will be 95 years old. (Or, more accurately, I would have been 95 years old. Let's be realistic.)

But the 30-year term isn't my only gripe about these very long-term TIPS. While they appear to be solidly safe Treasury investments, they are highly volatile and can lose more than 10% of their value in a couple of months. Traders in TIPS might like that volatility. I don't.

The coupon rate and real yield to maturity for this TIPS will be set at the auction's close. An interesting side note: The Treasury is issuing $8 billion of this TIPS, compared with $7 billion of the same term in February 2018 and February 2017. That is a 14% boost in supply, reflecting rising federal deficits. Will there be enough demand to support a 14% boost in yearly supply?

On the positive side are two factors that make this auction somewhat attractive: 1) 30-year after-inflation yields have been climbing over the last two years and remain "relatively" high, and 2) the 30-year inflation breakeven rate has plummeted, making this TIPS more attractive versus a nominal 30-year Treasury.

Real yields: Higher, but high enough?

At Friday's close, the U.S. Treasury was estimating a full-term 30-year TIPS would have a real yield to maturity of 1.10%, meaning it will outperform inflation by 1.1% over the next 30 years. Although that is well below the near-term high of 1.32% hit on November 2, 2018, it remains well above the sub-1% yields that have been common

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, 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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