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:
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:
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.
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