By David Enna, Tipswatch.com
The Treasury just announced results of its $19 billion offering of a reopened 5-year TIPS, CUSIP 91282CGW5, and investors should be pleased.
This 4-year, 10-month Treasury Inflation-Protected Security got an auctioned real yield of 1.832%, the highest for any auction of this term since October 2008. There have been 46 auctions of 4- to 5-year TIPS over that time and only one other — in October 2022, got a real yield higher than 1.7%.
Real yields (meaning the yield an investor will earn above U.S. inflation) have been moving higher in recent weeks, reacting to the Federal Reserve’s potential plan to raise short-term interest rates once or twice again this year.
Definition: 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 inflation.
So, if inflation averages 2.5% over the next 4 years, 10 months, an investor in this TIPS would earn a nominal annualized return of 4.33%. If inflation averages 4%, the return would be 5.83% … and so on.
Here is a history of 5-year real yields over the last 14 years, showing the long periods of deeply negative real yields, right up until March 2022, when the Fed began aggressively battling inflation with higher interest rates:
Auction result, pricing
Here are details from the Treasury announcement:
Key factors for investors: 1) the unadjusted price of 97.339740 and 2) the inflation index of 1.01121 on the settlement date of June 30, 2023. This is how the investment pricing works out:
In essence, a $1,000 investment at par for this TIPS will cost $984.31 on the closing date, even though the investor will have $1,011.21 of principal on that date. From that point forward, the investor will earn the coupon rate of 1.25% applied to the principal balance, which will rise (or possibly fall) with future monthly inflation.
The prepayment of accrued interest will be returned at the first coupon payment on Oct. 15, 2023.
Calculation of real yield to maturity
Several readers have asked about how to do a calculation to check the real yield to maturity. Since this is a Treasury issue, I am confident the 1.832% real yield is accurate, and my rough estimate comes to close to that number. But reader Jim came up with the answer in the comments section below:
The real yield (“High Yield” in Treasury Auction Results) is a classic Yield To Maturity calculation using the issue date, maturity date, coupon rate, coupon frequency, unadjusted price and face value of the bond. It also is based on the day count assumption of a 30/360. If you wish to replicate the computation the easiest way is to use the YIELD function in excel. For this auction it would look like this, YIELD(6/30/2023,4/15/2028,1.25%,97.339740, 100,2,0). YTM is found by finding the rate necessary in the basic bond value equation so that the discounted future coupon payments and bond face amount equals the price paid for the bond. This is done by iterations using different rates until you find the correct value. Best to let a computer do it for you!
So, using Excel’s YIELD function, this is how you can set up the formula and find the result:
Inflation breakeven rate
At the auction’s close at 1 p.m. EDT, a 5-year Treasury note was trading with a nominal yield of 4.03%, creating an inflation breakeven rate of 2.2% for this TIPS. That is the lowest auctioned breakeven rate for this term since an auction in December 2020.
Although 2.2% is a relatively “highish” breakeven rate by historical standards, it seems quite reasonable at a time when U.S. inflation is running at 4.0%. In indicates that this TIPS is cheaply priced versus the nominal Treasury of the same term.
Here is the history of the 5-year inflation breakeven rate over the last 14 years:
Reaction to the auction
Things seemed to go smoothly. Through the morning, CUSIP 91282CGW5 was trading on the secondary market with a real yield in the range of 1.82% to 1.86%. The bid to cover ratio was a solid 2.56, so demand looked reasonably strong. After the auction’s close, the TIP ETF — which holds the broad range of maturities — moved slightly higher, indicating slightly lower yields. That’s an indication of a positive market reaction to the auction.
I was a buyer at this auction, even though I already purchased CUSIP 91282CGW5 at the April auction. A real yield of 1.83% was impossible to pass up. I might (or might not) have been able to do better earlier in the day on the secondary market, but Vanguard’s brokerage was only offering lot sizes of $100,000 or more.
No problem. I am happy with today’s result. If you were a buyer today, post your thoughts in the comments section below. Here are auction results for TIPS of this term over the last 5 years:
• Confused by TIPS? Read my Q&A on TIPS
• TIPS in depth: Understand the language
• TIPS on the secondary market: Things to consider
• Upcoming schedule of TIPS auctions
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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 
I am also in the “skicky” inflation camp…going from 4 to 3 will be hard while going from 3 to 2 may qualify as mission impossible ..with all the money committed with three different, already passed, legislative initiatives, wage growth and services inflation is here to stay … however, all bets are off if some unknown exogenous event, aka grey swan (does’nt have to be always black) messes up the economy … 🙂
I also bought at this auction and happy about it. Since I am new to buying (so far only at auction) TIPS, it will take me a while to build a ladder. Given the fact that we have a limited time left, say 6-9 months max, before real yields dive down, buying at auction has limitations on being able to build a TIPS ladder. Although I almost understand the relationships between, coupon, YTM, interest rates, TIPS vlaue (discounted, premium), etc. for bonds, I have a lot to learn on how to identify deals is the TIPS secondary market…..if there is info on this, please share.
I agree that unless you have been at this ladder-building for years, now is the time to act to lock in high yields, which means making a series of purchases on the secondary market. Decide what percentage of your portfolio you want to devote to this and start building. (But of course we really have no idea where future interest rates are heading.) … On spotting deals on secondary TIPS, real yield to maturity is the key factor, matched with maturity date.
You are right about real YTM as the key factor matched with maurity date, all else amounts to getting lost in the weeds, at least for me. Given the fact that I am building this ladder only in our tax deferred account, it makes the “weeds” even less important…thanks!!!
You say “I have a lot to learn on how to identify deals is (sic) the TIPS secondary market…..if there is info on this, please share.”
Just open a brokerage account with Vanguard as they have a great bond search tool. You can peruse available offerings by maturity (or other attributes) and it will give you the YTM for each. Log in periodically to monitor changes in YTM
Thanks!!!…I alrewady have a Venguard account.
Great! Using that while the markets are open allows you to see prices/YTM for lots that are of a size that fits your budget. That is much better than using some info site that posts results after the market is closed and (probably) reflects “industrial” size lots.
Thanks!!
On the discussion of the break-even rate, I think there is some sentiment that the economy overinflated and so the inflation rates moving forward will be correcting downward. Obviously no one has a crystal ball but it is not an unreasonable prediction.
Thank you for your great site. I have a question about comparing TIPS on the secondary market. I think I understand the inflation factor and accrued interest. I understand that YTM reflects market demand and coupon rate. Does YTM take into account the interest that will be earned from purchase to maturity? OR, do I have to calculate the interest over the years and add that to the yield at maturity? Our ladder is missing years 6,7 and 8. Most of the lower price TIPS have a low coupon rate but the YTM is comparable. Thank you
Thank you for your great site. I have a question about comparing TIPs on the secondary market. I think I understand the inflation factor and accrued interest. I understand that YTM is dependent on market demand and the coupon rate. Does YTM take into account the interest that will be earned from time of purchase to maturity? OR, do I need to calculate the interest over the years and add that to the yield at maturity to compare 2 TIPS? Our ladder is missing years 6,7 and 8. Many of the lower price tips have a very low coupon rate even though the YTM is comparable. Thank you!
The coupon rate + the discount or premium you pay for principal determines the real yield to maturity. So yes, the coupon rate is part of the equation. TIPS with below market coupon rates sell at a discount, which equalizes the real yield for similar maturities.
Sorry about the duplicate question. I thought it didn’t post because the site blinked out for a minute. I understand that the coupon rate is part of the factors that determine YTM. But if I have 2 tips to buy, and the YTM is similar, if I want to look at the total return do I need to calculate the interest that I will earn each year and the ultimate YTM on each one to compare them or is the YTM the bottom line? Thank you
The coupon rate could be a factor in your actual return if we hit a severe stretch of deflation, because the coupon would continue to be paid. So a higher coupon could protect a bit, even though principal would be declining. But in reality, real yield to maturity is the main factor to consider.
Thank you. If I buy on the secondary market, the hours seem to be different than the regular stock market. Are there set hours for trading on the secondary market?
David, can you take me through the calculations that get to the real yield of 1.832%? I would have thought that it was the 1.25% coupon times the adjusted principal to compute the interest payment, which would then be divided by the discounted purchase price. But clearly that isn’t right.
I’ve been wondering the same thing, and can’t get the math to work.
Are you including amortization of the discounted purchase price in your calculation? You paid $97.33974 (unadjusted) and will receive par (before inflation adjustment) at maturity, so you will get $2.66026 in principal in addition to the interest payments over the 4-year, 9-and-some-fraction-month remaining term.
@woody, thank you for this…no, I was not factoring in the fact that the bond will pay par at maturity. I figured whatever I was doing wrong would seem obvious once pointed out to me and yes, that’s the case here!
I don’t have a formula (I am sure someone does, yes?), but since this is a Treasury auction, I am confident the quoted real yield is correct. But to give a simple idea, here is a rough calculation: This TIPS sold at 97.339740, a discount of 2.66% to received principal. The term is 58 months, so that works out to a return of about 0.55% a year. Add 0.55% to the coupon rate of 1.25% and you get 1.8%, very close to the quoted auction result.
Thanks David…I did the same rough math after woody pointed out what I missing. I knew I was making a very basic mistake!
The real yield (“High Yield” in Treasury Auction Results) is a classic Yield To Maturity calculation using the issue date, maturity date, coupon rate, coupon frequency, unadjusted price and face value of the bond. It also is based on the day count assumption of a 30/360. If you wish to replicate the computation the easiest way is to use the YIELD function in excel. For this auction it would look like this, YIELD(6/30/2023,4/15/2028,1.25%,97.339740, 100,2,0). YTM is found by finding the rate necessary in the basic bond value equation so that the discounted future coupon payments and bond face amount equals the price paid for the bond. This is done by iterations using different rates until you find the correct value. Best to let a computer do it for you!
Love your YIELD function tip, found it in my OpenOffice Calc and it worked: 1.832%
YIELD is easy. Wish I saw that before following the Treasury Offering Announcement’s reference to 31 CFR Part 356, and it’s Appendix B, III. FORMULAS FOR CONVERSION OF INFLATION INDEXED SECURITY YIELDS TO EQUIVALENT PRICES
https://www.treasurydirect.gov/files/laws-and-regulations/auction-regulations-uoc/31-cfr-part-356.pdf on page 32.
I knew if I asked often enough a clever reader would come up with the solution. Thank you! I created an example in Excel for future reference, but of course I will forget all about it in time …. So I am going to place this in the story and FAQ to remind me.
Quick formatting note: Excel returns a #NUM error if you forget to enclose the date strings in double quotes (or it did for me, at least). David’s example above works because the cells are already formatted as dates.
I.e. =YIELD(“6/30/2023″,”4/15/2028”,0.0125,97.339740,100,2,0)
David,
In your post you said, “since this is a Treasury auction, I am confident the quoted real yield is correct.”
Of course it is, but not because you can be sure that the Treasury did the math right. A competitive bid for a TIP is for a certain par amount and a real yield expressed with three decimals, like 1.832 in this auction. Using the highest real yield bid, Treasury then computes the unadjusted price and so on. So, the High Yield listed in the Auction Results is just the winning bid, no math required.
Thus, when we compute YTM from the values in the auction results we are really working backwards.
I’ve been reading this blog and other resources to try and better understand investing in TIPs. Frankly, I’m struggling to really understand them. However, I know my portfolio needs an allocation to an inflation security like TIPs. I’ve been contemplating just buying TIP or VTIP, rather than individual securities. Thoughts on that? I retired, but most of my funds are in after-tax accounts, so sticking the ETF’s in pre-tax is difficult. Thoughts on that?
I personally own VTIP, which is my holding fund I use to make future purchases of individual TIPS. It’s a good fund, but will be subject to interest-rate risks. It has a low duration so the risks aren’t high.
Never, never, NEVER BUY an ETF or MUTUAL FUND holding TIPS. Because they don’t all work the same as if you owned the individual bonds!! Only individual ownership gives you control over “holding-to-maturity” (which is the key factor producing the YTM interest rate you found acceptable at purchase). Only individual ownership guarantees that when the every 6 month’s interest payment occurs you will get an immediate distribution in-full. For example the SCHP Schwab TIPS fund reserves the right to hold and reinvest TIPS interest payments however they see fit – they also reserve the right to sell all TIPS they hold.
I bought my first-ever TIPS today after reading your blog. I’m still trying to get a handle on all the numbers. I can follow the price and accrued interest calculations, and I’ll hope I can match up the interest payments and adjusted principal every October and April. I see Fidelity will be showing the market value, so it may take some trial and error to figure out how I want to show it in my financial software. Since I bought in a retirement account, at least I don’t have to worry about the taxes. One question I had– at maturity, is the adjusted principal returned (assuming it exceeds the PAR value)?
I’ve read your TIPS In-Depth and Q&A several times, but I’ve never completely gotten the grasp. I figured buying one auction would be a good way to learn. I Bonds and Treasury Bills are way easier to understand!
Can’t speak for Fidelity, but Vanguard adds (or sometimes subtracts) partial shares to each TIPS holding, every month, to match the inflation accruals. And of course the brokerage is going to track market value, not par value x inflation index. (I track accrued value separately on a spreadsheet.) The coupon payments are just paid out and go to the cash account.
David, your great site has turned me into a government bond nurd. I never considered TIPS until your site educated me. Bought 12,000 of 91282CGW5 on 4/20/23 and got 9,000 more today on 6/22/23. We will see the tax impact (3,000 in Treasury Direct), but the remaining 18K are in retirement accounts to hold until maturity. With I bonds, the increases will be much less since the strategy is to unload as many 0% I bonds as possible with the 10K purchase each year. Maybe a 1,000 net increase each year.
I purchased 5K on my IRA account. This saves me from complicated tax calculations. I do have a 1K of the same TIPS bought in April at a 1..32 Yield. This is so much better. I do intend keeping both to maturity. Thank you very much for your guidance, you may not want to call it recommendation, but it certainly helps.
I have very little concern about deflation. We may have it for a quarter or two in the 4 year 10 month period but overall I am at ease and maybe even happy. I have the idea that although the FED is independent the Executive Branch and Congress are inflationary. The US effort in helping Ukraine while well intentioned, can not be called deflationary and the green energy push while needed is also inflationary. In the short run at least.
A plug for Vanguard with whom I have done business nearly 50 years. My brokerage statement makes figuring taxes on TIPS fairly easy. Better than average execution as well.
👍
Thanks for the guidance/advice (OK, for legal reasons, it was “commentary”) leading up to this auction, of which I was a buyer. Being someone who is reluctant to buy green bananas, I’d hesitate before going out more that 5 years, but this one suited me well. It will be interesting to see if the inflation breakeven proves to be satisfactory. It looks great now, but I’m a bit worried about storm clouds just over the horizon.
Cliff, I love your comment about the green bananas! My father-in-law used to joke he was “getting too old to buy green bananas”, but that was when he was 80 and he is now 93…
Thanks for all your sage advice, David. I ended up investing $10K instead of my original plan of 5–put the remainder of my cash in an 8 week T-bill. I’m very happy about the rate, and also that I won’t have to worry about reinvesting that portion for 4+ years. Not sure my hubby is going to be pleased about the tax complications of my recent discovery of TIPS. I’ve been pondering how much extra this would add to the bill if we used an accountant…
Why do you think you need a accountant as a result of buying TIPs? If you engage an accountant, you still have to obtain all of the tax information yourself and organize it for the accountant. At that point, you (your hubby) might just as well enter it into tax software yourself. Are you buying your TIPs at Treasury Direct? If you buy through a broker like Vanguard, they will provide you with the tax information you need.
Not getting an accountant yet, although I always threaten to in the middle of tax preparation. I’ve just heard that each new form triggers an additional fee, and I can’t imagine what the one from Treasury costs! Agree that collecting the info is the major part of the work. Unexpected late-arriving K-1 form from investment made through Schwab almost did us in this year….
I saw you say “K-1″….I had Plain America Energy Partnership (or something like that) investment…I have Schwab accounts since 1993….K-1 was a nightmare….not worth it, finally I got rid of it…in the past, Turbo Tax had errors dealing with K-1s…
Thanks David. I bought at this auction. Inflation has become sticky. Can see it in recent labour contract negotiations of longshoremen, an at the Boeing plant in Kansas. For those of you that study financial history, I would like to hear your comments. Past inflationary pressures rarely fade away in only a year or two. I bought expecting inflation to remain well above 2.4% for next 5 years. I hope that I am wrong and the rest of my portfolio flourishes! As most of you, I buy TIPS as an insurance policy.
TIPS have become my primary investment over the years. And I bonds. The vagaries of the stock market no longer hold much appeal, been through too many crashes with slow recoveries. I suspect the current AI mania will result in another.
I did buy some today. I’ve been reading your blog for a few years but this year I’ve been buying TIPS in my IRA as a way to have a minimum safe investment. Thank you for making understanding this investment a little easier. Next Im going to put my emergency fund in I-bonds over time.
I recommend against putting emergency funds into Ibonds. The primary use case for Ibonds is holding for multiple years, often multiple decades. The use case for emergency funds is extremely high liquidity and instant availability, ideally same-day.
Also, I learned the hard way that US Treasury low-level support people have the power to put a lock on your ability to make any Ibond transactions, i.e. they can freeze your account and prevent you from selling if they decide that you’ve tripped some security trigger because you asked too many support questions. You might then have to go get a bank medallion signature to unfreeze your account. The process can take weeks.
I like I Bonds as a “back-up” emergency fund, with the intention to hold them at least 5 years. At that point, the money can be withdrawn without penalty for use as you might need it. But you still need a cash-based emergency fund for current spending and potential emergencies.
If you have good credit and are disciplined about using it, credit cards/balance transfer checks are good enough for true emergencies. In this regard, CD’s are a little better since you can take the money out after paying the penalty.
Credit cards are a fine thing, if you pay off the balance every month. Balance transfers usually come with some sort of charge, like about 3% of the amount? (I’ve never done that.) In retirement, the “emergency fund” becomes the “everything fund,” since it will be the source of your spending that exceeds whatever pension/Social Security income you have coming in. My main everything fund is a Fidelity CMA and the true emergency fund is in staggered 13-week and 26-week T-bills. But I Bonds will become of use in the future.
Well done David. Also a buyer at this auction. I do ladder my TIPS purchases, but I am not chained to the auction schedule.
Today’s news seems to indicate overseas central banks expect inflation to be ‘sticky’ going forward.