Real Yield In 5-Year TIPS Auction Drops To 0.152%

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  • Five-year real yields have dropped nearly 100 basis points in the last six months. That's a huge move in anticipation of Federal Reserve rate cuts.
  • Today's real yield of 0.152% had to be a disappointment to investors, who also had to pay a premium price for this TIPS.
  • The five-year inflation breakeven rate climbed a bit to 1.60%, indicating somewhat stronger demand for inflation protection.

The Treasury's $15 billion reopening auction of CUSIP 9128286N5 - creating a 4-year, 10-month Treasury Inflation-Protected Security - generated a real yield of 0.152%, dramatically lower than recent auctions of this term.

Just six months ago, in December, a similar five-year TIPS reopening went off with a real yield of 1.129%, a whopping 98 basis points higher than Thursday's result.

What caused the plummet? That December 20 auction came a day after the Federal Reserve raised its Federal Funds Rate by 25 basis points to a range of 2.25% to 2.50%, where it remains today. Today's five-year TIPS auction came a day after the Federal Reserve gave a clear signal that rate cuts are coming, possibly soon. The Fed's Open Market Committee said:

In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion ...

The Fed's statement Wednesday has caused a quick decline in both real and nominal interest rates. The yield on a nominal 10-year Treasury today fell below 2.0%, 66 basis points lower than where it began the year.

So for investors, today's TIPS auction had to be a disappointment, with the real yield (meaning yield above inflation) dropping from about 0.35% last week to 0.152% today.

A TIPS is an Treasury investment with a coupon rate that is well below that of a nominal Treasury of the same term. But with a TIPS, the investor's principal balance is adjusted up (or sometimes down) each month to match U.S. inflation. The "real yield" of a TIPS indicates the amount investors will earn above inflation.

CUSIP 9128286N5 carries a coupon rate of 0.50%, which was set at the originating auction on April 18. So, because today's auctioned real yield was

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 be purchased through the Treasury or other providers without fees, commissions or carrying charges.

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