By David Enna, Tipswatch.com
The U.S. Treasury on Thursday will auction $22 billion in a new 5-year Treasury Inflation-Protected Security, and the results should be attractive for investors seeking protection from future inflation. It should generate the highest real yield to maturity for any auction of this term in 15 years.
This is CUSIP 91282CJH5, which will mature Oct. 15, 2028. The $22 billion auction size is the largest ever for this term, up from $21 billion for similar auctions in October 2022 and April 2023. The coupon rate and real yield to maturity will be set by the auction results.
Real yield: What to expect
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 each year until maturity.
As of Friday’s market close, the Treasury was estimating the real yield of a 5-year TIPS at 2.39%, down 21 basis points from a week earlier. Treasury yields have been sliding lower based on a combination of more dovish comments by Federal Reserve officials, and a flight to safety in the wake of turmoil in the Mideast.
Nevertheless, a real yield of 2.39% is historically high. No 4- or 5-year TIPS has auctioned with a real yield above 2% since October 2008 (then at 3.270% in the depths of financial panic). The most recent auction of a new 5-year TIPS, in April, got a real yield of 1.32%, more than 100 basis points lower.
Another positive factor for this auction is that the coupon rate could end up at 2.375% if the real yield remains higher. That would be the highest coupon rate for any 5-year TIPS at auction since April 2006. That means this TIPS would pay out 2.375% annually on top of inflation-adjusted accruals to the principal balance.
Fun fact: As recently as March 2022, a 5-year Treasury note had a nominal yield of 2.33%, less than the likely yield of this TIPS above inflation. Just shows you the mighty move we have seen in bond yields, and why this new TIPS looks attractive.
Here is the 5-year real yield trend over the last 20 years, reinforcing that the current real yield is historically attractive:
Pricing
Because this is a new TIPS, the Treasury will set the coupon rate slightly below the auctioned real yield and investors will get a slightly discounted price. However, the inflation index on the Oct. 31 settlement date will be 1.00225, so the adjusted price will probably come in right around par.
Some investors like these new issues because they are buying very little accrued inflation, which is not protected against deflation. So this new TIPS should fit that profile. (I consider long-term deflation risk to be a minor factor in TIPS investing.)
Also, because this is a new TIPS, there won’t be a viable secondary market alternative for this October 2028 maturity for a few weeks, at least. But there is a TIPS maturing in April 2028 with a coupon rate of 1.25% and a secondary-market price around 95.18. Its real yield is currently 2.381%.
Inflation breakeven rate
With a 5-year nominal Treasury currently yielding 4.65%, this TIPS would have an inflation breakeven rate of 2.26%, a bit lower than recent auction results for this term. This is another factor making this an attractive investment. If you believe annual inflation will average more than 2.26% over five years, buy the TIPS and not the nominal Treasury.
Here is the trend in the 5-year inflation breakeven rate over the last 20 years, showing that the current rate of 2.26% fits into a “normal” range, meaning the TIPS is not expensive versus a nominal Treasury:
Other alternatives?
I Bonds. The U.S. Series I Savings Bond is a good comparable for a 5-year TIPS, since the I Bond can be redeemed after 5 years with no penalty. It currently has a fixed rate of 0.9% (which may go higher for I Bonds purchased after November 1). Still, that is a huge yield gap with a 5-year TIPS yielding 2.39%. For an investor who can handle the complexity, a 5-year TIPS is the superior investment.
Would I still buy I Bonds with a fixed rate of 0.9%, or higher? Yes, in combination with TIPS. For me, I Bonds are a super-safe, inflation-adjusted, tax-deferred savings account.
Bank CDs. Best-in-nation 5-year CDs are currently yielding about 4.85%, according to DepositAccounts.com. That’s a bit better than the nominal 5-year Treasury, but interest would be subject to state income taxes. I’d still prefer the TIPS.
Final thoughts
For anyone looking to fill a 2028 spot in a TIPS ladder or other investment plan, this auction looks like a no-brainer. The result should be attractive, although recent TIPS auctions have not produced stellar yield “surprises.” There’s no way to know what yield a non-competitive bid will get until you see the auction results, which will be announced at 1 p.m. ET Thursday.
I won’t be a buyer. Why? My TIPS ladder is loaded with issues maturing in 2028, so I have been looking to fill other needs, even though this TIPS is more attractive than all my current holdings. Oh, well.
If you are pondering an investment at Thursday’s auction, keep an eye on the Treasury’s Real Yield Curve page, which updates at the market’s close each day. This is an estimate, but can give you a good idea of how yields are trending.
The auction closes at 1 pm EDT. Non-competitive bids at TreasuryDirect must be placed by noon Thursday. If you are putting an order in through a brokerage, make sure to place your order Wednesday or very early Thursday, because brokers cut off auction orders before the noon deadline. I hope to post the results soon after the close.
Here is the history of recent TIPS auctions of the 4- to 5-year term:
• Now is an ideal time to build a TIPS ladder
• 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 
After the market close, Fidelity has an expected yield of 2.22% for tomorrow’s 5-year TIP. However, Bloomberg shows an end-of-day yield on 5 yrs (secondary market) of 2.59%
Seems like a big differential to me. Your thoughts on this, David?
Fidelity often drops the ball on these auction estimates, high or low. It looks more likely that this auction will end up at 2.50%+.
Another disappointing auction with a clearing yield of 2.44%, which is ~12 bps lower than the current yield of 2.555%.
at 5 years, the term is not that long. -12 bps over 5 years will be 0.6?…….Inflation adjustments over 5 years will determine if this auction is good for those who participated or not. 5 years later, how would participants’ mind change about this auction results – will they be disappointed or delighted? only 5 years later, time will tell.
It’s not whether it will matter a lot after 5 years, it’s just disappointing that the auction yield was so much lower than what the secondary market was offering today. It’s a much higher yield than available a few months ago, so it’s a good result from that perspective. Just an odd misalignment with the secondary market. In retrospect, I should have just bought on the secondary myself.
I felt the difference was due to strong demand at the auction.
They said that as reason for yesterday’s 20 year auction where secondary market yields were maybe 0.04 higher even though coupon rates were lower and many issues was trading at deep discount. Whoever bought into that auction for 5.24 is staring at the screen now and seeing 5.38……….when things move up or down, lots of room for disappointments at auctions where supply/demand is at work and more evident than in secondary market! Pardon me if I got it all wrong 🙂 Just sharing thoughts and as knowledgebase changes, thoughst too change 🙂
Nope. The bid to cover ratio was 2.36x, which indicates relatively weak demand.
So…I was just on https://www.bloomberg.com/markets/rates-bonds/government-bonds/us. Looks like the 5 year TIPS has a yield of 2.58% now!!!?
I’ve got a buy order in for tomorrow’s auction, so let’s hope it holds! I’ve had nothing but buyer’s remorse for the 5-year April one I bought, but maybe this one will turn out better. Ha.
I bought some of the Apr ’23 at the original auction as well. I haven’t been concerned since at least the yield is positive! So I decided to pick up another chunk of the Apr ’23 at 2.37% on secondary a few days ago rather than hold out on a chance higher real yield with the new auction. It bobbled up and down a bit since then, but so what. For the small quantities I deal with, the difference of 1/8% or 1/4% or so per year really amounts to little more than noise – a couple extra lattes. Not worth stress. Best of luck to you and everyone else though.
Yes, I was in on that April auction, too, which at the time I called an “attractive result.” https://tipswatch.com/2023/04/20/new-5-year-tips-gets-a-real-yield-of-1-32-an-attractive-result/ It’s fine. The real yield was 1.32% and the investment cost ended up under par. I’ve done worse. But there was really no way to see the surge in yields that was coming.
Fidelity is showing this with a 2.375% coupon rate. This is just an estimate, right, with the actual coupon determined at the auction?
Correct, it is an estimate.
Hi David, You wrote the following a while back in response to a question I had regarding tracking the value of a TIPS bond.
“I personally track all my TIPS, even ones held at a brokerage, using par value x inflation index, to show the current accrued principal. Market value is irrelevant to me since I am holding to maturity.”
Where would you find the “par value x inflation index” amount? Or if this is calculated, how so?
I’m diving back into TIPS with this 5-year auction and am considering how to track its value. I have to admit, with more than a little chagrin, your last sentence in that quote was an eye opener. Makes sense.
Thanks, Mike
If you buy a TIPS in a brokerage account, you will be reminded of its market value every day until maturity, because the market real yield is constantly changing. So you can’t avoid that, and it will be necessary to use market value to determine RMDs, if you must take them. However, interesting thing … if you buy a TIPS at TreasuryDirect (a taxable account), that site will never show you “market value,” because you can’t sell the TIPS on TreasuryDirect. So it shows you simply par value x inflation index.
What is par value? It is the base amount of the TIPS you originally purchased. If you bought $10,000 of a TIPS, you might have paid $9,789 or $10,057 to complete the purchase, because of the variance in the coupon rate and market real yield. No matter what you paid, $10,000 is the par value of the TIPS … your original purchase quantity, not the purchase price.
You can find inflation indexes for all TIPS updated daily on this Wall Street Journal page: https://www.wsj.com/market-data/bonds/tips … It is listed as “accrued principal” and a number like 1313 means the inflation index is 1.313. So for example $10,000 par value x 1.313 accrued principal = $13,130 current principal.
Thank you – very much appreciated.
yes, treasurydirect doesn’t track the prices as they yo yo during the term to maturity. Brokerages track prices by the minute causing people to be in a constant state of REACTION and make mistakes by becoming inadvertent day-traders whereas they THOUGHT they were buy and hold at the time of purchase. That is the affect it has on the brain constantly feeding real time pricing data for longer term securities.
Having said that, it is a nightmare to transfer securities from treasurydircet to fidelity JUST IN CASE life events require early redemption – we are talking upto 6 months for them to make a move, one way or other! That can be difficult to deal with in emergencies!
My advice: Don’t buy a TIPS at TreasuryDirect unless you are 100% sure you can hold to maturity.
Really enjoy your blog, David. I have a question about the upcoming 5 yr auction. Would it be better to wait until the auction is completed to buy this bond, since at that point the real yield will be known?
It might be better, or not. Impossible to say because yields constantly fluctuate. The problem with new issues is that the secondary market will be slim for several weeks, at least. So it may be hard to find small-scale lots for months. So the other option would be to buy the TIPS maturing in Apr 2028, CUSIP 91282CGW5, which is trading around 2.35% for a smaller purchase.
David…wondering what your thoughts might be on IShares new IBonds definded maturity TIPS ETF. Could these new ETFs be a “good enough” proxy for ownership of actual TIPS? They give individual investors a lot of advantages (1. can own a small amount, 2. Can buy and sell on the market 3. Taxes are easier to report, 4. available to everyone with a broker account, 5. etc).
These are interesting, but I haven’t had time to look at them in depth. The expense ratio is good at 0.1% and they look interesting for a taxable account, but reinvestment would be difficult because they trade at extremely low levels, so far.
I don’t know exactly how the inflation adjustment is handled with the ETF. I was thinking that it would just increase the value of the etf and then would get taxed as a capital gain when the ETF cashed out. I’m studying to see how it works in the real world. Sure would make an interesting blog posting.
No such luck! The inflation adjustment is taxable income to the ETF (just like coupon interest) and it must offset that income by making taxable distributions to shareholders.
Thanks for clarifying! The taxman always seems to win!
Should we buy in secondary market a TIPS security with LOW COUPON RATE (real yield is market based, inflation factor even if high still keeps price per security under $100 in some cases and this is preferable) or should we BUY in this AUCTION with HIGHEST COUPON RATE and price at PAR or close?
It all depends on what it is you wish TO ACCOMPLISH.
In an IRA account, I would go with this new issue as none of this really matters much – maybe some if you are wishing to REINVEST periodically what you get in interest payments at 2.3x in this NEW ISSUE vs. 0.125 or more in secondary market offerings – if reinvestment is an issue, then ofcourse higher rate is preferable.
In a NON-IRA account, I would buy this NEW ISSUE with higher coupon so I will have interest payments come in at the higher rate number so it will help if income stream is important for me presently and it will give me a nice inflation protection.
if TAX PLANNING is IMPORTANT at present, then I would look at REGULAR TREASURY SECURITIES THAT ARE DEEP / MARKET DISCOUNT BONDS that have similar term of 5 years or desired (longer) term like 10 15, 20, 30 years with LOW COUPON RATE like 0.125 or close and even with inflation factor adjustment, selling BELOW PAR which BELOW PAR matters more so the LONGER the DURATION as duration risk is there and you don’t want to take a chance on PRINCIPAL PROTECTION…………
So what this TAX SENSITIVE PLANNING effectively does is keep interest income stream LOW for the duration so you can accomplish things like IRA to ROTH conversions, qualified IRA withdrawals taxed at LOWER TAX BRACKET, qualify for obamacare credits, keep TAX BRACKET from bumping up unnecessarily especially when you don’t have a NEED for this interest income right away etc.
Discounted bonds held in taxable accounts generate taxable income. See IRS Pub 1212, Guide to Original Issue Discount. TIPS held in taxable accounts generate taxable income from the cash interest paid and the inflation adjusted principal amount. This non-cash income (amortization of purchase discount plus the inflation adjustment amount) is why many people only hold TIPS in non-taxed accounts.
Overall, the real yield is the most important factor. But I would always prefer a TIPS with a high real yield and a high coupon rate, selling at near par. That works in a taxable or tax-deferred account. Those aren’t always easy to find on the secondary market, but this new issue fits the bill perfectly. In a taxable account, you want a decent coupon rate to cover the taxes owed on the inflation adjustments. In a tax-deferred account, that’s not so important. So … so you want income to re-invest, or not? Tax-deferred is the way to go with a long-term TIPS ladder, in my opinion.
Hi David,
I live in CA which has high state income tax. I am not sure which account I should buy TIPS from (taxable which has exempt State income tax) or (IRA which tax deferred but will be taxes state income). Your Statement ” Tax-deferred is the way to go with a long-term TIPS ladder, in my opinion” is still the same for people live in CA. Your opinion is appreciated.
It’s true that a TIPS in a tax-deferred account will lose its state tax exemption, since all proceeds will be taxable. And California has high state taxes, probably around 8% or 9% for most people reading this site. With a 5-year TIPS, like this one, the issue could mature and you would not sell it, so it would roll over with the continued tax-exemption and you could reinvest. I really don’t have an answer.
Thanks for reply my question David