Investor demand might have been a bit weak.
By David Enna, Tipswatch.com
The Treasury’s offering of $19 billion in a reopened 10-year TIPS – CUSIP 91282CPU9 – generated a real yield to maturity of 1.896%, a bit higher than the market was expecting.
The reopening auction created a 9-year, 10-month TIPS. The coupon rate of 1.875% was set by the originating auction on Jan. 22, 2026.
This TIPS trades on the secondary market, and through the morning its real yield was inching higher, from about 1.85% around 8 a.m. to 1.88% right before the auction’s close. The “when-issued” yield prediction used by bond traders was 1.88%, so the resulting yield of 1.896% indicates relatively weak demand. The bid-to-cover ratio, however, was strong at 2.47, the highest for the last six auctions of this term.
Definition: The “real yield to maturity” of a TIPS is its yield above future U.S. inflation, over the term of the TIPS. So a real yield of 1.896% means an investment in this TIPS would provide a return that exceeds official U.S. inflation by 1.896% for 9 years, 10 months.
It’s been a volatile week for Treasury issues in a market roiled by potential price shocks from a war in the Mideast, and then contradictory messaging by Federal Reserve Chairman Jerome Powell on Wednesday. So overall, this auction result looks pretty solid.
Here is the trend in the 10-year real yield over the last two years, with this auction’s yield falling just below the mid-range of yields:
Pricing
Because the auctioned real yield was slightly above the coupon rate, investors got this TIPS at a discounted unadjusted price of 99.810964. In addition, it will carry an inflation index of 1.00086 on the settlement date of March 31. With that information, we can calculate the exact cost of a $10,000 par investment at this auction:
- Par value: $10,000.
- Adjusted principal on settlement date: $10,000 x 1.00086 = $10,008.60.
- Cost of investment. $10,008.60 x 0.99810964 = $9,989.68.
- + accrued interest of $38.88.
In summary, an investor purchasing $10,000 in par value will pay $9,989.68 for $10,008.60 of principal on the settlement date of March 31. From then on, the investor will earn accruals matching future inflation plus collect an annual coupon rate of 1.875% on adjusted principal. The $38.88 in accrued interest will be returned at the first coupon payment on July 15.
Inflation breakeven rate
At the auction’s close, the 10-year Treasury note was trading with a nominal yield of 4.28%, giving this TIPS an inflation breakeven rate of 2.38%, a bit high but in line with many recent auction results. This means the TIPS will outperform the nominal Treasury if inflation averages more than 2.38% over the next 9 years, 10 months. Inflation has averaged 3.3% over the last 10 years, ending in February.
Here is the trend in the 10-year inflation breakeven rate over the last two years, showing that this auction ended in the trend’s higher range:
Thoughts
This looks like a solid result for investors. The yield of 1.896% was below January’s originating auction at 1.940%, but still attractive when compared to auctions over the last 15 years. For investors, the Treasury market is highly uncertain. The White House appears to be asking Congress for an additional $200 billion to support the war with Iran (and potentially to restock dwindling weapon supplies.) This would add to the Treasury’s heavy load of borrowing and potentially drive medium- and longer-term interest rates higher.
Inflation definitely is a concern for the near term and possibly longer. And then what will be the effect of an oil-price-shock on the U.S. economy? In his press conference Wednesday, Powell used the term “don’t know” 17 times (Forbes did the counting), including this quote on the current oil crunch:
The economic effects could be bigger, they could be smaller, they could be much smaller or much bigger. We just don’t know.
The Fed doesn’t know, and neither do we. And for that reason, investors should set aside some allocation to protect against inflation.
CUSIP 91282CPU9 will get one more reopening auction on May 21 and then a new 10-year TIPS will be auctioned on July 23. Here is the history of auctions for this term over the last four years:
• Confused by TIPS? Read my Q&A on TIPS
• TIPS in depth: Understand the language
• 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.
