By David Enna, Tipswatch.com
Investors were ready and willing to jump aboard today’s auction of a reopened 30-year Treasury Inflation-Protected Security, CUSIP 912810UH9. And why not? The resulting real yield to maturity of 2.650% was the highest for this term at auction since October 2001.
This TIPS will mature February 15, 2055. It has a coupon rate of 2.375%, which was set by the originating auction on February 20, 2025.
Demand at this auction looked strong. The “when-issued” yield prediction was 2.673%, but bidders brought that down to 2.650%. The bid-to-cover ratio was 2.78, much higher than recent auctions of this term. There is a market for 30-year TIPS!
Definition: The “real yield to maturity” of a TIPS is its yield above official future U.S. inflation, over the term of the TIPS. So a real yield of 2.65% means an investment in this TIPS would provide a return that exceeds U.S. inflation by 2.65% for 29 years, 6 months.
As I noted in my preview article for this auction, the Treasury halted 30-year TIPS auctions from October 2001 to February 2010. Before 2001, auctioned real yields were much higher across all maturities of TIPS. But today’s above-inflation yield of 2.650% was nearly 25 basis points higher than any other auction of this term since 2010.
Here is the trend in the 30-year real yield over the last 2 1/2 years:
Pricing
Because the auction’s real yield of 2.650% was well above the coupon rate of 2.375%, investors got this TIPS at a substantial discount, an unadjusted price of 94.399471. In addition, it will carry an inflation index of 1.02189 on the settlement date of Aug. 29. With that information, we can calculate the exact cost of a $10,000 investment:
- Par value purchased: $10,000.
- Principal on settlement date: $10,000 x 1.02189 = $10,218.90
- Cost of investment: $10,218.90 x 0.94399471 = $9,646.59
- + accrued interest of $9.23
In summary, an investor placing an order for $10,000 of this TIPS paid $9,646.59 for $10,218.90 of principal as of the August 29 settlement date. From then on, the investor will earn inflation accruals matching U.S. inflation, plus an annual coupon rate of 2.375% for the next 29 years, 6 months.
Inflation breakeven rate
The 30-year Treasury bond was trading with a nominal yield of 4.92% at the auction’s close, so this TIPS gets an inflation breakeven rate of 2.27%, in line with recent auction results. This means it will outperform the nominal bond if inflation averages more than 2.27% over the next 29 years, 6 months.
Some perspective: Look at 30-year inflation averages over the last 55 years. Only one 30-year period (ending in 2020) had average inflation of 2.2%. Every other one was higher.
The inflation breakeven rate isn’t truly a prediction of future rates. It is a measure of current sentiment. Here is the trend in the 30-year inflation breakeven rate over the last 2 1/2 years:
Reaction
For daring investors willing to take on the very long term, this TIPS ended up being a strong investment. Yes, real yields could continue to climb, but getting 2.65% above inflation makes for a strong asset — one you couldn’t find for nearly 24 years.
The auction result wasn’t much of a surprise, but demand was strong. That hasn’t always been true for this 30-year term, one reason the Treasury has kept auction sizes steady for four years, while bumping up sizes for 5- and 10-year TIPS.
For today’s buyers, I just want to point out that just four years ago this same term and same auction size got a real yield of -0.292%. Today’s result was a whopping 294 basis points higher. Congrats on your purchase.
Here are auction results for this term over the last five years:
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• Confused by TIPS? Read my Q&A on TIPS
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• TIPS on the secondary market: Things to consider
• TIPS investor: Don’t over-think the threat of deflation
• Upcoming schedule of TIPS auctions
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
