The U.S. Treasury's auction of a new 30-year Treasury Inflation-Protected Security went off Thursday with a sensational result: A record low real yield of just 0.261%, well below any 29- to to 30-year TIPS auction in history.
This was CUSIP 912810SM1, and the auction set its coupon rate at 0.250%, also a record low for any TIPS auction in history. No 30-year TIPS, dating back this security's birth in 1998, has ever had a coupon rate of less than 0.625%.
A TIPS is an 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.
In this case, CUSIP 912810SM1 will have a real yield to maturity of just 0.261%. No kidding, this is remarkable. Before today, the lowest auctioned real yield for any 29- to 30-year TIPS was 0.479%, set in the dark days of quantitative easing in October 2012. There have been 35 TIPS auctions of this term since 1998, and this one came in with the lowest yield ever, by a big margin.
Over the last 10 years -- because of aggressive Federal Reserve intervention -- TIPS yields across a large spectrum have been much lower than they are today. But in February 2020, it is only the very long end of the yield curve that is severely depressed. I find this hard to understand, except that I have seen numerous commentaries recently extolling long-term TIPS as an investment. So, is high demand for long-term inflation protection driving yields lower? It could be. Two charts will provide evidence.
Let's take a a look at real yields for 5-, 10- and 30-year TIPS over the last 10 years. What I find very interesting is that the spread between the 30-year TIPS and the shorter maturities was very wide back in 2012, when the 30-year TIPS yield last reached its record low (until today):
Now, let's jump to February 11, 2020, just a few days ago:
This demonstrates that long-term TIPS real yields are being bid down strongly, even in the absence of Federal Reserve intervention. This means there is strong global demand for long-term inflation protection.
In my opinion, though, this trend makes very long term TIPS overbought, very risky and very undesirable. In my opinion, there's a lot better chance that long-term yields will rebound higher, as short-term rates stay stable or even decline. I'd prefer investments in shorter-term TIPS.
The auction result
Investors at today's auction paid an adjusted price of about $99.68 for about $99.96 of value, after accrued inflation is figured in. The price ends up being a slight discount because this TIPS will have an inflation index of 0.99959 on the settlement date of February 28.
With a nominal 30-year Treasury trading today at 1.97%, this new TIPS gets an inflation breakeven rate of 1.71%, a fairly attractive number. U.S. inflation is currently running at 2.5% and has averaged 1.8% over the last 10 years.
This relatively low inflation breakeven rate is a key factor in the appeal of a 30-year TIPS for big-money investors like foreign central banks, pension funds and hedge funds. This TIPS provides a predictable long-term return that is seen as favorable versus a 30-year nominal Treasury at 1.97%.
The TIP ETF had been trading slightly higher all morning but took a strong move upward after the close of this auction at 1 p.m. EST. This is a good indication that the auction was met with positive demand.
But as I noted in my preview article, I was definitely not a fan of this new TIPS, and the results bore out my fears: Too much risk and too little return.
It is stunning to me that a small-scale investor can buy a zero-risk inflation-protected investment -- the U.S. Series I Savings Bond -- today with a fixed rate of 0.20%. That fixed rate is equivalent to the "real yield" of a 30-year TIPS, and is only 6 basis points lower.
I Bonds have significant advantages over 30-year TIPS, among them:
I am pounding the table for I Bonds. As for this new 30-year TIPS, I am just marking down its sad place in history. For the record, here is that history:
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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 purchased through the Treasury or other providers without fees, commissions or carrying charges.