Upcoming: Auctions to watch, decisions from the Federal Reserve, and an important inflation report.
By David Enna, Tipswatch.com
I have to admit that things have seemed pretty sleepy in the peaceful aftermath of the doomsday debt-ceiling crisis. So much “excitement,” and then … naptime.
But things will change this week:
Monday, June 12: The Treasury will auction $65 billion in a 13-week T-bill and $58 billion in a 26-week T-bill. These should provide attractive yields. The auction sizes are larger than normal as the Treasury is working to rebuild its coffers. So far, yields on T-bills have been fairly stable, once the debt-crisis volatility ended. Will the increased issuance cause any cracks?
Also Monday, the Treasury will auction $40 billion in a 3-year Treasury note and $32 billion in a 9-year, 11-month note reopening.
Tuesday, June 13: The Bureau of Labor Statistics will release the May inflation report at 8:30 a.m. EDT. U.S. all-items inflation as of April was running at an annual rate of 4.9%, down from a high of 9.1% in June 2022. Core inflation, though, has been holding steady at around 5.5% through all of 2023.
According to Barron’s, the consensus estimate for May all-items inflation is 0.1%, down from 0.4% in April. But Econoday.com pegs the consensus estimate for all-items inflation at 0.2% for the month and 4.1% year over year.
A 4.1% year-over-year inflation rate would be great news for the Fed — showing the trend it wants — but a high core number could tamp down the optimism. Here is the annual trend through April:
This will be an important inflation report because on Wednesday the Federal Reserve will announce if it will in fact pause increases in short-term interest rates, along with providing future guidance.
Also Tuesday, the Treasury will auction $38 billion in a one-year T-bill. Plus, it will stage a 6-week cash management auction for $45 billion.
And one more thing on Tuesday … Treasury will auction $18 billion in a 29-year, 11-month bond reopening.
Wednesday, June 14. Sometime just after 2 p.m. EDT, the Federal Reserve will announce its decision on short-term interest rates. Because the Fed has signaled strongly that it “may” pause rate hikes this month, that is what I expect will happen. (The Fed uses this signaling as a market-calming strategy.) But markets will be watching closely to see what guidance Fed Chair Jay Powell provides on the Fed’s future plans. I am expecting him to leave the door open to further rate hikes and dismiss any speculation about rate cuts in 2023.
Also Wednesday, the Treasury will auction a 17-week T-bill. The amount has not yet been announced.
Thursday, June 15. Treasury will make a routine announcement about its upcoming reopening auction for CUSIP 91282CGW5, creating a 4-year, 10-month Treasury Inflation Protected Security. The auction will close at 1 p.m. June 22. I will be posting a preview article on that auction next Sunday morning.
Also Thursday, Treasury will auction 4- and 8-week T-bills. The amounts have not yet been announced.
Another thing to watch
I continue to be fascinated by TIPS maturing in the 2040-to-2043 range because real yields remain especially attractive in this 20-year range. My idea is to lock up longer-term real yields of 1.7%+ and hold to maturity. That still isn’t possible for the one year I need for my ladder, 2040. Yields have actually declined slightly in the last few days. From Vanguard:
My expectation has been that when the Fed actually halts interest-rate increases, we should see a more-traditional steeping of the yield curve, with the 5-year TIPS declining a bit and the longer-term yields rising. Instead, we currently have an odd pattern of peaks and valleys, with the 10-year having the lowest real yield:
These are U.S. Treasury estimates for full-term TIPS at par value, in other words eliminating any effects from coupon rate premiums or accrued inflation. But as you can see by comparing this to the Vanguard secondary offerings, TIPS in that 2040 to 2043 range remain at attractive yields.
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Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear. Please stay on topic and avoid political tirades.
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.
Treasury Inflation-Protected Securities 
Thank you for this. I struggle to believe buying 20-year (ish) maturities in the secondary market is an efficient way to build a ladder. It appears from the Vanguard screengrab the prices and yields displayed are for $75,000 face value. The two issues at the top of the list have the highest yield and are priced below par. Nevertheless you’d need a pretty big chunk of cash to buy the minimum. The number of people who have $75,000 in cash to buy these issues in the secondary market may not be trivial but surely much fewer in number than those of us who have at least $1,000 to bid non-competitively at the auction. I can’t see the TIPS secondary market every having enough liquidity for true retail efficiency. Perhaps we need a letter writing campaign to make Treasury auction an original 20-year TIPS?
What do you think of I-bonds as effectively part of a real-yield ladder composing both TIPS and I-bonds? If you max your I-bond investment every year you have a ladder with a lot of optionality. The first objection would be the current I-bond real rate is 0.90%, much lower than the long-term real yield on TIPS. However you can buy small amounts and the option value of never going negative and being able to cash out anytime between 10 and 30 years without transaction costs is valuable, IMHO.
I had similar qualms about TIPS on the secondary market, but once longer-term real yields started rising, I explored the concept more completely. If you look at those 2040 to 2043 TIPS at Vanguard, and then click on the “show more” link under each offering, you can see lot sizes as small as $1,000 on the ask side, and those lose about 1 to 2 basis points of real yield. So not a huge deal. As an experiment, try placing a test order for $10,000 or $15,000 and see what the yield is, and then cancel out.
I agree with the concept of using I Bonds as a supplement to the TIPS ladder, especially for the years 2034 to 2039 when there are no TIPS available. I Bonds are a very flexible investment, where you can choose when to redeem.
I’ll be 70 this summer. I set up a TIPS ladder that extends out through 2033. Not willing to go much longer than that. For money that I won’t need for more than 10 years, I think a low-cost fund that invests in a mix of fixed income and income-producing equities presents a better risk/reward ratio. FMSDX has a yearly return over the past 5 years of 8.64%, which includes the bond and stock market debacle of 2022. “Normally investing primarily in income producing securities of all types. Allocating the fund’s assets among equity and debt securities, including common and preferred stock, investment-grade debt securities, lower-quality debt securities (those of less than investment-grade quality, also referred to as high yield debt securities or junk bonds), floating rate securities, and convertible securities. Investing in domestic and foreign issuers.” In terms of TIPS, short term (less than 5 or 6 years) looks more attractive to me than long term. Not only is real yield higher, but it seems like inflation is likely remain above average for at least another couple of years. Over 10 years or longer things are a lot less clear, but it seems like inflation is more likely to revert towards average. And if there is a recession or financial crisis due to rising interest rates, short term interest rates will come down a lot faster resulting in capital gains even though inflation may remain stubbornly high.
I’ll turn 70 this summer too, in September, but still technically summer. I am fine using one traditional IRA account to ladder TIPS out to 2043, when “in theory” I will turn 90. This is part of our overall portfolio allocation, within our plan. (65% fixed income including cash, 35% stock). This is a personal decision. My problem with FMSDX is the expense ratio of 0.73%, too high for my liking. And it is a bit too complicated for me to grasp. I can see the reasons you like it. I’d definitely want this in a tax-deferred account, since there are going to be capital gains and dividend/interest income.
The focus should be on recent core CPI data, which would be month-to-month (M/M), and maybe look at the last three months. Half the annual (Y/Y) data includes rates over six months old. Who cares?
Also I like to see the actual CPI data to two decimal places. A published .4% CPI increase can be anything between .35% and .44%, because of rounding. It is so stupid because the BLS data from which the change is calculated is provided to three decimal places. If you annualize .35% simply you get an annualized CPI of 4.20%. If you annualize .44% simply you get an annualized CPI of 5.28%. Big difference. Of course I can calculate it on my own, but it can be misleading to others.
Core is obviously much more important for the Fed, but when egg prices rose 170% and gas prices skyrocketed for a few months, the Fed realized it had to pay attention to all-items inflation. Now gas prices are softening inflation, so core looks worse. Non-seasonal all-items is still super important to track, since it sets TIPS inflation accruals, I Bond interest rates and Social Security COLAs.
By “cracks,” do you mean lower yields?
“ Monday, June 12: The Treasury will auction $65 billion in a 13-week T-bill and $58 billion in a 26-week T-bill. These should provide attractive yields. The auction sizes are larger than normal as the Treasury is working to rebuild its coffers. So far, yields on T-bills have been fairly stable, once the debt-crisis volatility ended. Will the increased issuance cause any cracks?”
Logically, higher yields, but also some issues in longer-term bonds, stocks. Some sort of financial pressures.
I definitely agree these yields are attractive and delaying in expectations of higher rates could easily prove disappointing. (The voice of bitter experience.)