Five Year TIPS auction next week.

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antiqueman
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Five Year TIPS auction next week.

Post by antiqueman » Thu Apr 16, 2020 6:41 pm

There is an initial offering next Thursday on a 5 year TIPS.

For those of you who are building a LMP or otherwise follow TIPS, do you think the TIPS will have a positive yield. I am concerned it will not.

grok87
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Re: Five Year TIPS auction next week.

Post by grok87 » Thu Apr 16, 2020 6:58 pm

antiqueman wrote:
Thu Apr 16, 2020 6:41 pm
There is an initial offering next Thursday on a 5 year TIPS.

For those of you who are building a LMP or otherwise follow TIPS, do you think the TIPS will have a positive yield. I am concerned it will not.
i would bet on a negative yield. see this link for the mechanics of how that works
https://www.treasurydirect.gov/instit/m ... gative.htm
..
here's a link back to auctions in 2011 at negative yield
https://www.treasurydirect.gov/instit/a ... 0421_1.pdf
...
current yield of the previous 5 year tip is -0.35%
https://www.bloomberg.com/markets/rates ... t-bonds/us
RIP Mr. Bogle.

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#Cruncher
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Re: Five Year TIPS auction next week.

Post by #Cruncher » Fri Apr 17, 2020 4:47 pm

grok87 wrote:
Thu Apr 16, 2020 6:58 pm
here's a link back to auctions in 2011 at negative yield
https://www.treasurydirect.gov/instit/a ... 0421_1.pdf
There have been many 5-year TIPS auctions with negative yields. As shown in the next to rightmost column here, the most recent was held 4/20/2017 with a yield of -0.049%. In all such cases the coupon was the minimum 0.125% [ * ] and the [unadjusted] price was at a premium to par.
grok87 in same post wrote:current yield of the previous 5 year tip is -0.35%
https://www.bloomberg.com/markets/rates ... t-bonds/us
Bloomberg reports the latest or "on-the-run" issue of each maturity. For the 5-year TIPS this is the one maturing 10/15/2024. But, in my opinion, this is not the best indicator of what the yield might be for the upcoming auction of the TIPS to mature in April 2025. (This has to do with the effect on TIPS yields of them being indexed to the non-seasonally adjusted Consumer Price Index.) I would estimate the auction yield based on the April 2024 maturity adjusted for being one year further out on the yield curve. Today's WSJ TIPS Quotes shows the October 2024's yield to be -0.281%. However, I get an estimate of -0.184%.

Code: Select all

         Jan      July      April
2024  (0.033%)  (0.174%)  (0.075%)
2025  (0.177%)  (0.247%)  (0.184%) <-- add avg diff to Apr 2024 to estimate Apr 2025
Diff  (0.144%)  (0.073%)  (0.109%) <-- average of Jan & July 2025 vs 2024 differences
I added the average difference from 2024 to 2025 of the January and July 10-year maturities to the April 2024 yield to get an estimate of what the yield would be for an April 2025. I think this is a little better than just using the -0.281% of the October 2024 maturity or the -0.31% 5-year constant maturity yield shown on the Daily Treasury Real Yield Curve Rates for 4/17/2020.

Edited 8:50 PM 4/17/2020 to add this footnote:
* Actually at the reopening auction 10/25/2010, while the yield was negative, the coupon was not 0.125%, it was 0.5%. This is because that coupon was set at the initial auction (where the yield was +0.55%) and remained the same for the later reopening of the same issue.
Last edited by #Cruncher on Fri Apr 17, 2020 7:50 pm, edited 1 time in total.

grok87
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Re: Five Year TIPS auction next week.

Post by grok87 » Fri Apr 17, 2020 5:50 pm

#Cruncher wrote:
Fri Apr 17, 2020 4:47 pm
grok87 wrote:
Thu Apr 16, 2020 6:58 pm
here's a link back to auctions in 2011 at negative yield
https://www.treasurydirect.gov/instit/a ... 0421_1.pdf
There have been many 5-year TIPS auctions with negative yields. As shown in the next to rightmost column here, the most recent was held 4/20/2017 with a yield of -0.049%. In all such cases the coupon was the minimum 0.125% and the [unadjusted] price was at a premium to par.
grok87 in same post wrote:current yield of the previous 5 year tip is -0.35%
https://www.bloomberg.com/markets/rates ... t-bonds/us
Bloomberg reports the latest or "on-the-run" issue of each maturity. For the 5-year TIPS this is the one maturing 10/15/2024. But, in my opinion, this is not the best indicator of what the yield might be for the upcoming auction of the TIPS to mature in April 2025. (This has to do with the effect on TIPS yields of them being indexed to the non-seasonally adjusted Consumer Price Index.) I would estimate the auction yield based on the April 2024 maturity adjusted for being one year further out on the yield curve. Today's WSJ TIPS Quotes shows the October 2024's yield to be -0.281%. However, I get an estimate of -0.184%.

Code: Select all

         Jan      July      April
2024  (0.033%)  (0.174%)  (0.075%)
2025  (0.177%)  (0.247%)  (0.184%) <-- add avg diff to Apr 2024 to estimate Apr 2025
Diff  (0.144%)  (0.073%)  (0.109%) <-- average of Jan & July 2025 vs 2024 differences
I added the average difference from 2024 to 2025 of the January and July 10-year maturities to the April 2024 yield to get an estimate of what the yield would be for an April 2025. I think this is a little better than just using the -0.281% of the October 2024 maturity or the -0.31% 5-year constant maturity yield shown on the Daily Treasury Real Yield Curve Rates for 4/17/2020.
thanks
RIP Mr. Bogle.

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Re: Five Year TIPS auction next week.

Post by #Cruncher » Wed Apr 22, 2020 3:32 pm

Here's an update of my estimate for the yield at tomorrow's (Thursday 4/23/2020) 5-year TIPS auction. It's not much changed from my post on Friday.

I would estimate the auction yield based on the April 2024 maturity adjusted for being one year further out on the yield curve. Applying this method to today's WSJ TIPS Quotes I get an estimate of -0.157%.

Code: Select all

          Jan       Jul     April
2024  (0.018%)  (0.138%)  (0.034%)
2025  (0.173%)  (0.228%)  (0.157%) <-- add avg diff to Apr 2024 to estimate Apr 2025
Diff  (0.155%)  (0.090%)  (0.123%) <-- average of Jan & July 2025 vs 2024 differences
I added the average difference from 2024 to 2025 of the January and July 10-year maturities to the April 2024 yield to get an estimate of what the yield would be for an April 2025. I think this is a little better than just using the -0.287% of the October 2024 maturity or the -0.32% 5-year constant maturity yield shown on the Daily Treasury Real Yield Curve Rates for 4/22/2020.

The market anticipates very little inflation over the next five years. The 2.875% coupon nominal Treasury maturing 4/30/2025 has a yield of +0.383% according to today's WSJ Treasury Quotes. This is a breakeven inflation rate of only 0.54% versus my estimate (0.383% - -0.157%).

Update Thursday 4/23/2020 4:00 PM: The yield came in at -0.320% as shown on the auction results PDF. This was exactly the same as the 5-year constant maturity yield shown on the Daily Treasury Real Yield Curve Rates for yesterday 4/22/2020. As it turned out my estimate based on a complicated interpolation was off the mark. :confused

Rho2020
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Re: Five Year TIPS auction next week.

Post by Rho2020 » Thu Apr 23, 2020 8:41 pm

I was hoping for your well considered forecast to be correct. I understand the Fed was a large buyer and likely not so price sensitive.

grok87
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Joined: Tue Feb 27, 2007 9:00 pm

Re: Five Year TIPS auction next week.

Post by grok87 » Fri Apr 24, 2020 12:39 pm

here is the fly's take
https://thefly.com/landingPageNews.php? ... -was-solid
wrote: Treasury's $17 B 5-year TIPS auction was was solid Treasury's $17 B 5-year TIPS auction was was solid. The offering priced very well and garnered record participation from foreign buyers who are more accustomed to index linked bonds. This suggests a bigger concern over inflation prospects than is being appreciated by domestic accounts. The offering stopped at -0.32% versus -0.29% at the bid deadline. And that compares to 0.020% stop from the $15 B December reopening and the 0.054% from the last new issue in October. The plunge in rates reflects the deflationary impacts from the coronavirus and the economic shutdowns resulting in unprecedented demand destruction. Indirect bidders were awarded a record 827%, up from December's 55.1% and the 67.9% from October. Bids totaled $46.6 B for a 2.74 cover, in line with the 2.75 from the new issue, and fractionally better than the 2.69 from the $15 B December sale. Direct bidders accepted only 3.0% versus 31.8% in December, while primary dealers took 14.3% versus 13.1% previously.
to translate some of the lingo...

their starting point is where the bonds are trading on the secondary market just before the auction. since in this case this is a new auction, not a reopening there really is no secondary market trading per se. but there is something called the "WI" or "when issued" which is trading of the security before it technically exists, sort of like a futures market i guess
https://www.thestreet.com/topic/47323/w ... ading.html

so on the WI market the yield was -0.29% just before the auction. there was high demand at the auction so it "stopped through". that means the auction yield came in lower than the trading pre auction. if the opposite happens and there is weak demand then the auction "tails"- which means the auction yield is higher than the secondary market trading.

cheers,
grok
RIP Mr. Bogle.

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