10-Year TIPS Reopening Gets A Real Yield Of -0.966%, Lowest In History

Sep. 17, 2020 2:47 PM ETTIP, VTIP, SCHP, STIP, LTPZ, SPIP, TIPZ, STPZ, TIPX, TDTF, TDTT, PBTP10 Comments
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Summary

  • The real yield of -0.966% was slightly higher than where this TIPS was trading on the secondary market just minutes before the auction's close.
  • The inflation break-even rate settled in at 1.65%, which looks like a reasonable number. Inflation hawks should see this as a positive for this investment.
  • This TIPS auction could be considered "normal" by the strange standards of normality in 2020.

The Treasury's $12 billion reopening of CUSIP 912828ZZ6, creating a 9-year, 10-month Treasury Inflation-Protected Security, auctioned Thursday with a real yield to maturity of -0.966%, the lowest yield for any auction of this term.

Continuing a recent trend in TIPS auctions, the real yield ticked a bit higher than expected, possibly indicating weakish demand from investors. At 11 a.m., two hours before the auction's close, this TIPS was trading on the secondary market with a real yield of -1.00%, and even at 12:41 p.m., it was trading at -0.98%. So investors managed to snag a higher return albeit only slightly higher.

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 (or below) inflation.

In this case, CUSIP 912828ZZ6 already carries a coupon rate of 0.125%, based on the originating auction on July 23, which set the previous all-time low-yield for this term, at -0.93%. Investors at today's auction had to pay a huge premium for that 0.125% coupon rate, with the adjusted auction price coming in at about $112.39 for about $101.40 of principal, after accrued inflation is added in.

A "negative real yield" does not mean that investors will get a negative return. It means that investors at today's auction are willing to accept a return that will lag official U.S. inflation by 0.966% over the next 10 years. That negative real yield reflects the reality of nominal Treasury yields - the 10-year Treasury note is yielding 0.68%, also likely to lag future inflation.

Real yields have declined

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, 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 purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

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