This Week's 5-Year TIPS Auction: Not Stellar, But Acceptable?

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  • Above-inflation yields have declined sharply, but still remain "relatively" attractive compared to those of the last 10 years.
  • Five-year bank CDs yielding above 3% are a compelling alternative.
  • I Bonds with the current fixed rate of 0.5% are also more attractive, so buy I Bonds to the max before investing in this five-year TIPS.

A lot has changed since December, when I declared that month's five-year TIPS reopening auction "a screaming buy." That auction generated a real yield of 1.129%, the highest for any auction for this term since April 2009.

The screaming is over, folks. In just four months, real yields (meaning yields above inflation) have declined sharply. The U.S. Treasury on Friday estimated that a full-term five-year TIPS would have a real yield of 0.52%, down a remarkable 61 basis points since that December auction.

Thursday, the Treasury is creating a new five-year Treasury Inflation-Protected Security, CUSIP 9128286N5, in a $17 billion offering.

A TIPS investment carries a coupon rate, which is determined by the originating auction. That coupon rate confuses some investors because it is lower than that of a comparable nominal Treasury. However, with a TIPS, principal balances are adjusted higher or lower each month to reflect U.S. inflation.

The "real yield to maturity" is also set by the auction, and reflects the investors' actual return above inflation. The real yield at an originating auction will always be slightly higher than the coupon rate.

As of today, with four days to go, CUSIP 9128286N5 looks likely to get a real yield to maturity of 0.52% and a coupon rate of 0.50%. If the auctioned real yield slips below 0.50%, the coupon rate will fall to 0.375%.

While the recent decline in real yields is disappointing, a coupon rate of 0.50% would still be relatively attractive. A year ago, on April 19, 2018, a five-year TIPS generated a real yield of 0.631% and a coupon rate of 0.625%. But before that, there were 21 consecutive four- to five-year TIPS auctions with a coupon rate of 0.125%, the lowest the Treasury will go. That string dates all the way back to April 2011.

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.

Additional disclosure: David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he recommends can purchased through the Treasury or other providers without fees, commissions or carrying charges.

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