10-Year TIPS Reopening Gets Real Yield Of 0.174%, Lowest In 3 Years

Sep. 20, 2019 8:39 AM ETTIP, VTIP, SCHP, STIP, SPIP, LTPZ, TIPZ, STPZ, TDTF, TIPX, TDTT, PBTP4 Comments
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Summary

  • Real yields are near Treasury-estimate lows for 2019, but have popped slightly higher in recent weeks.
  • Today's auction yield of 0.174% meant that investors had to pay a premium to get a 0.250% after-inflation coupon rate.
  • The inflation breakeven rate came in at 1.60%, a three-year low. A number this low had to spur interest from big-money investors.

The U.S. Treasury's offering Thursday of $12 billion in a reopened 10-year Treasury Inflation-Protected Security resulted in a real yield to maturity of 0.174%, the lowest for this auction term in three years.

This is CUSIP 9128287D6, and the reopening created a 9-year, 10-month TIPS with a 0.250% coupon rate, which was set at the originating auction in July. Because today's auction yield came in lower than the coupon rate, investors had to pay a premium, about $101.04 for about $100.30 of value, after accrued inflation is added in.

A TIPS is a Treasury investment that pays a coupon rate well below that of other Treasury investments of the same term. But with a 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.

After-inflation yields have fallen dramatically in 2019, down from a high of 0.97% for a 10-year TIPS on January 28, according to U.S. Treasury estimates. This fall has made TIPS an unattractive investment for most small-scale investors, especially as inflation fears seem to be dwindling. But the inflation protection they provide versus similarly low-yielding nominal Treasurys is keeping demand strong among big-money investors like central banks and pension funds.

Here is the trend in the 10-year real yield since November 2018, showing the steep decline, even into negative real yields a few weeks ago:

10-year real yieldsInflation breakeven rate

With a 10-year nominal Treasury trading today with a real yield of 1.77%, this reopened TIPS gets an inflation breakeven rate of 1.60%, also a three-year low for TIPS auctions of this term. This means CUSIP 9128287D6 will outperform a nominal Treasury if inflation averages higher than 1.6% over the next 9 years, 10 months. Although 1.6% seems

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I am no longer writing for this site. More details. I will continue to post updates at my site, TipsWatch.com.-----David 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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