30-Year TIPS Auctions With Real Yield Of 1.093%, To Strong Demand

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Includes: IPE, LTPZ, PBTP, SCHP, STIP, STPZ, TDTF, TDTT, TIP, TIPX, TIPZ, VTIP
by: Tipswatch
Summary

The after-inflation yield of 1.093% was well below the real yield of 1.235% generated at an October auction of the same term.

Indirect buyers - meaning big money investors like foreign central banks - bought a record 82% of the $8 billion offering, indicating strong demand.

The inflation breakeven rate came in at 1.96%, below the number for recent auctions of this term.

A new 30-year Treasury Inflation-Protected Security, CUSIP 912810SG4, auctioned Thursday with a real yield of 1.093%, about 14 basis points lower than the result of a similar auction four months ago.

The auction set the new TIPS' coupon rate at 1.00%, meaning that buyers got it at a discount, with an adjusted price of about $97.48 for $100 of value. The coupon rate matches the result of a new-issue auction in February 2018, when the real yield (meaning yield above inflation) was slightly less, 1.003%. But that same 2018 TIPS, CUSIP 912810SB5, reopened in October with a real yield of 1.235%, substantially higher than today's result.

So, while the widely reported narrative is that Treasury yields have been steadily rising higher and potentially weakening the economy, 30-year real yields have been fairly stable. A 30-year TIPS auctioned in 2016 with the same coupon rate of 1.00% and a real yield of 1.12%, higher than Thursday's result.

And yet this auction was greeted with apparent strong demand, with indirect bidders (primarily central banks, pension funds, and hedge funds) purchasing a record 82% of the $8 billion issue. As noted in today's Wall Street Journal report:

Bidding was strong even as the yield on the 30-year Treasury inflation-protected security hovered at about 1.1%, near the lowest level since October. ...

"There are a couple of things coming down the pike that could reignite inflation pressures," said Thomas Simons, a money-market economist at Jefferies Financial Group. "In the near term the balance of risks are tilted toward the upside" for inflation, he said.

As I have noted many times, a 30-year TIPS is a risky investment for a small-scale investor, but long-term inflation protection can be attractive to big money investors like pension funds.

Inflation breakeven rate

With a 30-year nominal Treasury closing Thursday at 3.05%, this new TIPS gets an inflation breakeven rate of about 1.96%, which is lower than recent auctions of this term. This means CUSIP 912810SG4 will outperform a nominal Treasury if inflation averages more than 1.96% over the next 30 years.

I think 1.96% is an attractive number, and I'm sure it bolstered demand for this TIPS versus nominal 30-year Treasurys. But it also indicates that inflation expectations remain below 2% for the very long-term. Here is the one-year trend for the 30-year inflation breakeven rate, showing the sharp decline in inflation expectations, which had hovered above 2% most of the year:

30-year inflation breakeven

Conclusion

TIP ETF Demand for TIPS seems to be rising even as inflation expectations are dropping. Note that the price of the TIP ETF has climbed again above $110, above my traditional "buy signal." It closed Thursday at $110.95, after getting a small bump from the auction's close. A rising price indicates lower yields and stronger demand.

Here's a look at all the 29- to 30-year TIPS auctions since 2016:

TIP auction history Sorry for the delay in posting this article. I am currently traveling in Vietnam, and this auction closed at 1 a.m. local time as I was floating on a "junk" in the gorgeous Ha Long Bay. Beautiful place, zero Internet.

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.