TIPS Issued 1997 - 2011 / 2012 Graph

[#Cruncher]

(Edit 12/21/2012: see post below for update through 2012.)

With last Thursday's auction the Treasury has completed its monthly TIPS auctions for 2011. $135b of 5, 10, and 30 year bonds were issued; up from $88b in 2010; allaying fears the Treasury will terminate TIPS issuance.

Of the $796b issued since 1997, $136b has matured, leaving $660b outstanding. Here is a link to an April post with a graph showing the outstanding amounts by maturity year: TIPS Maturing 2012 - 2041 Graph
Source: TIPS Auctions in Order of Issuance

Edit: 04/15/2012: changed domain in image and link URLs

[baw703916]

Mr. Market apparently wants to lend money to the government at a negative real interest rate (for 5 and 10 year TIPS).

Uncle Sam would be a fool not to take that offer. It actually reduces risk on the Treasury side, too. By selling 10 year nominal Treasuries at a yield of 1.8%, it's hypothetically possible that inflation could turn out to be less than that over ten years, so the government would end up paying a real positive return to the bondholders. With TIPS sold at a negative real yield, no such problem.

Brad

[gabylon]

Mr. Market apparently wants to lend money to the government at a negative real interest rate (for 5 and 10 year TIPS).

Uncle Sam would be a fool not to take that offer. It actually reduces risk on the Treasury side, too. By selling 10 year nominal Treasuries at a yield of 1.8%, it's hypothetically possible that inflation could turn out to be less than that over ten years, so the government would end up paying a real positive return to the bondholders. With TIPS sold at a negative real yield, no such problem.

Brad

Hi Brad. Have you considered the opposite hypothetical possibility? That inflation turns out to be higher than the 1.8% minus the negative real interest rate, so the government ends up paying more nominal dollars for the TIPS than for the nominals?

[baw703916]

Hi Brad. Have you considered the opposite hypothetical possibility? That inflation turns out to be higher than the 1.8% minus the negative real interest rate, so the government ends up paying more nominal dollars for the TIPS than for the nominals?

That's true, it's quite likely that the real returns on both nominal Treasuries and TIPS will be negative. But only for TIPS is the government guaranteed to come out ahead . The only exception would be if the next ten years are so deflationary that the limitation that TIPS at maturity must be worth at least their par value comes into play. Say if the real yield in -0.15% and the annualized inflation rate over 10 years is -0.5%. But, 10 years of sustained deflation would cause a lot of bigger things to happen than just 10 year TIPS ending up with positive real returns.

Brad

[gabylon]

...But only for TIPS is the government guaranteed to come out ahead . The only exception would be if the next ten years are so deflationary that the limitation that TIPS at maturity must be worth at least their par value comes into play.

Mmm, I believe that in my example above the government comes out ahead with nominals. Isn't paying less dollars (whatever their real value) coming out ahead?

[baw703916]

...But only for TIPS is the government guaranteed to come out ahead . The only exception would be if the next ten years are so deflationary that the limitation that TIPS at maturity must be worth at least their par value comes into play.

Mmm, I believe that in my example above the government comes out ahead with nominals. Isn't paying less dollars (whatever their real value) coming out ahead?

OK, I had meant "ahead" in an absolute sense, meaning does the government get to borrow money at a negative real interest rate? You referred to whether the government ends up better off by selling TIPS or selling nominals.

Yes, if intlation is greater than about 2% over the next ten years, the government will end up better off selling nominals than TIPS. But, the government has a higher probability of paying a positive interest rate by issuing nominals than by issuing TIPS. They will pay a positive real yield on 10 year nominals if the inflation rate over the next ten years is < 1.85%. For 10 year TIPS, it would have to be <-0.11% for them to pay a positive real interest rate.

[#Cruncher]

This week the Treasury completed its twelve monthly TIPS auctions for 2012; issuing $150 billion of 5, 10, and 30 year bonds; up from $135 billion in 2011. 10-year TIPS continue to be most popular with $82 billion issued in six auctions, compared to $44 billion of 5-year and $23 billion of 30-year each in three auctions.


Of the $946 billion of face value issued since 1997, $182 billion has matured, leaving $764 billion outstanding. The table below shows (in $ millions) the face value along with the additional value due to the CPI inflation adjustment to principal and the premium due to market prices being above par:

Code: Select all

              CPI        Market        Total
  Face     Principal     Price        Market
  Value   Adjustment    Premium        Value
-------     -------    --------    ----------
182,068      38,740         -         220,808  Matured thru 2012
764,126      86,172     167,433     1,017,731  Outstanding Jan 1, 2013
-------     -------    --------    ----------
946,195     124,912     167,433     1,238,539  Total

The graph below breaks down the outstanding TIPS by a maturity year. The overall bar height represents the total market value of TIPS maturing each year. Broad market TIPS index funds like the iShares TIP ETF will hold TIPS in these proportions (except they omit the ones maturing in 2013). Short term TIPS index funds like the Vanguard VTIP ETF will hold in proportion to the market values of the ones maturing in 2013 - 2017.


And here is the total market value maturing each year by term:


And here is the total market value maturing each year by month:

Sources:
TIPS Auctions in Order of Issuance
WSJ TIPS Prices 12/21/2012