By David Enna, Tipswatch.com
The Treasury’s offering of $19 billion in a reopening auction of a 10-year Treasury Inflation-Protected Security — CUSIP 91282CPU9 — generated a real yield to maturity of 2.169%, a bit above secondary market trading.
This is a 9-year, 8-month TIPS with a coupon rate of 1.875%, set at the originating auction on Jan. 22. It had been trading on the secondary market Thursday morning with a real yield to maturity of about 2.14%, and the “when issued” bond-market prediction was 2.15%. This indicates demand was a bit weak for this offering, even though the bid-to-cover ratio was a reasonable 2.52.
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 2.169% means an investment in this TIPS would provide a return that exceeds official U.S. inflation by 2.169% for 9 years, 8 months.
Most likely, the real yield rose a bit higher because of market jitters over the U.S. stalemate with Iran, which has sent oil prices soaring. Iran reportedly is in talks on setting up a permanent toll for ships passing through the Strait of Hormuz, a position the U.S. opposes.
The result was a good one for investors. The real yield of 2.169% was near the top of the range for auctions since mid 2022, when real yields rose out of negative depths. At its originating auction in January, this TIPS got a real yield of 1.940%.
Here is the trend in the 10-year real yield over the last two years. While real yields have now climbed above 2.0%, they remain below highs of early 2025:
Pricing
Because the real yield came in well above the coupon rate of 1.875%, this TIPS auctioned at a discount, with an unadjusted price of 97.455252. It will also carry an inflation index of 1.01522 on the settlement date of May 29. With that information, we can calculate the cost of a $10,000 par value purchase at this auction:
- Par value: $10,000.
- Principal purchased on settlement date: $10,000 x 1.01522 = $10,152.20.
- Cost of investment: $10,152.20 x 0.97455252 = $9,893.85.
- + accrued interest of $70.46.
In summary, an investor paid $9,893.85 for $10,152.20 of principal on the settlement date of May 29. From then on, the investor will earn accruals matching future inflation, plus an annual coupon rate of 1.875% on adjusted principal. The 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 4.60%. That creates an inflation breakeven rate of 2.43% for this TIPS, the highest number since a similar auction in September 2022. A high inflation breakeven rate indicates a TIPS is “expensive” versus the nominal Treasury of the same term.
Investors were betting that U.S. inflation will exceed 2.43% over the next 9 years, 8 months. Over the last 10 years, inflation has averaged 3.4%.
Here is the trend in the 10-year inflation breakeven rate over the last two years, showing the recent surge higher in inflation expectations:
Thoughts
This was a good result for investors, with the real yield rising well above the most recent reopening of this term, 1.896% on March 19. But the fact that investor demand was lukewarm indicates the market fears higher real yields in the future.
Nevertheless, for an investor committed to holding to maturity, a real yield of 2.169% is attractive.
Interesting side note: Because non-seasonally-adjusted inflation surged 0.85% in April, holders of this TIPS will get a 0.85% boost to principal in June. The same goes for all TIPS, no matter when they were issued.
Here is the history over the last five years for TIPS auctions of this term. We’ve come a long way from the deeply negative real yields continuing through March 2022:
• 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.
