The Treasury's reopening auction of CUSIP 912810SG4 - creating a 29-year, 6-month Treasury Inflation-Protected Security - went off Thursday with a real yield to maturity of 0.501%, the lowest yield for any auction of this term since October 2012.
That real yield was down a bit from where this TIPS was trading on the secondary market at noon, an hour before the auction close. At that time, the real yield was 0.52%. The lower yield at auction indicates this issue had solid demand from investors.
TIPS are Treasury investments that pay a coupon rate well below that of other Treasury investments of the same term. But with TIPS, the principal balance adjusts each month (usually up, but sometimes down) to match the current U.S. inflation rate. So the "real yield to maturity" of a TIPS indicates how much an investor will earn above inflation.
CUSIP 912810SG4 had its originating auction on February 21, 2019, generating a real yield of 1.093% and a price of about $97.48 for $100 of par value. The coupon rate was set at 1.00%. Thursday's real yield was a whopping 59 basis points lower than the originating auction, and that meant investors had to pay a huge premium for the 1.00% coupon rate.
The adjusted price was about $115.68 for about $101.79 of value, after accrued inflation is added in. This TIPS will have an inflation index of 1.0179 on the settlement date of August 30, 2019.
The auction followed a months-long trend of swooning Treasury yields for both nominal and inflation-protected investments. Here is the year-to-date trend for the 30-year real yield, showing the dramatic trend downward:
But today's auction appears to have generated decent interest from investors, mostly big-money entities like foreign central banks and pension funds. Why? Because TIPS are now relatively cheap versus nominal Treasurys, offering the potential of predictable returns that will outperform inflation.
With a 30-year nominal Treasury yielding 2.10% today, this TIPS gets an inflation breakeven rate of 1.60%, the lowest for this term since a similar auction in June 2016. Even during the recent years of low to moderate inflation, the 30-year inflation breakeven rate has remained close to 2.0%. Today's result indicates inflation expectations are waning.
The breakeven rate means that if inflation averages more than 1.6% over the next 29 years, 6 months, this TIPS will outperform a 30-year nominal Treasury yielding 2.10%.
Inflation protection is a bargain right now, and even at this near-record-low real yield, today's auction was attractive for big-money investors. For small-scale investors, not so much. As I said in my auction preview, "the term is too long, the real yield is too low, and the risk is too high."
Here's the year-to-date trend in the 30-year inflation breakeven rate:
The TIP ETF, which holds the full range of maturities, had been trading slightly lower all morning, but surged nicely after the auction's close at 1 p.m. EDT. This is another good indication that the auction was met with solid investor demand.
Reuters is reporting that the ratio of bids to the amount of 30-year TIPS offered came in at 2.70, the strongest overall demand since June 2017, despite the low real yield. From the report:
Indirect bidders which include fund managers and foreign central banks were allotted 81.62% of the 30-year TIPS supply, marking their second-largest share ever at such an auction.
As I noted, as bond yields continue to swoon in global markets, TIPS remain somewhat attractive because of the very low inflation breakeven rate. TIPS offer above-inflation returns at a reasonable "relative" price.
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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.