5 yr TIPs auction announced 4/10- any takers?

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5 yr TIPs auction announced 4/10- any takers?

Post by Doc »

in February grok87 wrote:The upcoming 30 year tips auction will be announce this Thursday feb 13th. At that time you will be able to place orders for the auction- the actual auction is on feb 20th.

So anyone interested in these levels? I will be buying a small amount and am hoping for an auction yield of 1.5%. (current yield on the secondary market of the 29 year tip is 1.38%).

http://www.bogleheads.org/forum/viewtop ... 9#p1955179

The upcoming 5 year tips auction will be announce this Thursday April 10th. At that time you will be able to place orders for the auction - the actual auction is on April 17th.

So anyone interested in these levels? I will be buying a large amount and am hoping for an auction yield of at least 0% (So I won't have to deal with ABP) . (Current "Real Constant Maturity Treasury" rate is 0.11 as of 4/3/14)

http://www.treasury.gov/resource-center ... =realyield
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by tipswatcher »

I have a 10-year TIPS maturing this month so I am considering the 5-year as a replacement, or possibly a 10-year later in the year.

With a yield of 0.11% above inflation, a 5-year TIPS still can't compete with an I Bond, so obviously I Bonds are the way to go. But I have bought my allotment this year.

For anyone curious, the 5-year TIPS was yielding -1.45% one year ago. That is an increase of 156 basis points!

But still, maybe I will wait things out.

I am wondering, if the Federal Reserve begins raising short term interest rates late in 2015 and into 2016, would that not drive up yields on shorter-term TIPS? Of course, by then, this TIPS would be two years old, and who knows what will happen in the future. The Fed seems to bend with the markets.

Five year TIPS were yielding 0.97% back in September 2008 when the federal funds rate was 2.25%, the rate the Fed now expects by the end of 2016.

http://tipswatch.com/2014/04/03/when-th ... s-to-tips/
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by elgob.bogle »

Placed my order today!

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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by Random Musings »

rate as of 4/10 is -0.10.

Doc, any reason you are buying a large amount of these, or just part of your IPS?

RM
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by tipswatcher »

FYI, the 5-year TIPS yield dropped to -0.10% on Thursday, down 21 basis points in just eight days.

This is what happens when the stock market tanks. Flight to safety.

And it isn’t a good thing that a TIPS maturing 2019 Jul 15 is currently trading at -0.387%.

I will probably pass on this auction, don't need it for my ladder. But I do have a TIPS maturing next week and will have to stash that away for the next attractive auction.
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by kramer »

Doc's link was eye opening to me in that the quote for 5 year TIPs (-0.1%) differs so much from the link that I normally use:

http://www.bloomberg.com/markets/rates- ... -bonds/us/

quote = -0.57%

I assume that this has to do with slightly different maturity dates or something about the secondary market?
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by elgob.bogle »

My confirmation statement indicates: "U S TREASURY INFLATION INDEX NOTE WHEN ISSUED 0% 04/15/19 04/15/14". Is Vanguard indicating that the auction will occur on April 15?

BTW, my purchase will be part of my TIPs ladder construction per my ISP.

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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by tipswatcher »

Doc's link was eye opening to me in that the quote for 5 year TIPs (-0.1%) differs so much from the link that I normally use
Kramer, it's correct that the Bloomberg site shows the nearest item currently trading on the secondary market, and that would be the 5-year TIPS issued last year in April, so it is a 4-year TIPS today instead of a 5-year. It closed yesterday at -0.565%.

That Bloomberg site is great for TIPS being reissued, because it will be showing the market value of the TIPS being reissued. It is a little more iffy for new issues, since there can be a one-year time lag for 5- and 30-year TIPS.

Anyway, the Treasury's Yield Curve site does a pretty good job estimating the current value of TIPS of all maturities. They explain how they do it, but looks a bit magical to me:

http://www.treasury.gov/resource-center ... =realyield

It updates once a day and is currently showing -0.10% for a 5-year TIPS. TIPS are trading up today so the true current yield is probably lower than -0.10%.
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by richard »

tipswatcher wrote:FYI, the 5-year TIPS yield dropped to -0.10% on Thursday, down 21 basis points in just eight days.

This is what happens when the stock market tanks. Flight to safety.
This is what happens when the market lowers its estimate of economic performance - stocks drop and interest rates drop.
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by Rodc »

I confess I don't really get 5-year TIPS.

I worry about inflation in the long run much more than in the short run.

Sure I can roll over short TIPS, but easier to buy longer TIPS.
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by Doc »

Random Musings wrote:rate as of 4/10 is -0.10.

Doc, any reason you are buying a large amount of these, or just part of your IPS?

RM
I let my 10 year ladder collapse by rolling to short nominals after the '08 debacle and am now beginning to extend the duration again by buying double rungs of the fives.

The reason I said "large" was just a counterpoint to grok's small. The whole post was supposed to be a counterpoint to grok's emphasis on the 30. In grok's post people opined on long TIPS and I wanted to see what the opinions on short TIPS were.
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by Doc »

tipswatcher wrote: Anyway, the Treasury's Yield Curve site does a pretty good job estimating the current value of TIPS of all maturities. They explain how they do it, but looks a bit magical to me:
The spline fit is just a function used to smooth data. I haven't used it in over 40 years and I don't remember the details. The one wrinkle was a change the Treasury made some five years ago to force the curve through the on the run issue. (I assume that is what their term "knot" means.") As someone pointed out this "knot" would be the "five" that Bloomberg quoted which is now essentially a four. The whole idea is to predict what the five would be based on data that at least for Tips can be many months away.
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by Doc »

Rodc wrote:I confess I don't really get 5-year TIPS.

I worry about inflation in the long run much more than in the short run.

Sure I can roll over short TIPS, but easier to buy longer TIPS.
"Easy" shouldn't be a factor.

The best inflation hedge would be rolling 4 wk Treasuries bills. But you give up a lot of return if you do that so most people go longer. The longer the term the more inflation risk so at some point one might go to TIPS instead of nominals. How far out on the yield curve you go depends on term risk whether you are using inflation protected issues or not.

For myself I am not going to tie up a large amount of money for 20 or 30 years at a historically low real yield of 1 to 1.5%. But I don't buy long bonds even as part of a TBM fund based on factors described in Larry Swedroe's bond book.
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by Doc »

richard wrote:
tipswatcher wrote:FYI, the 5-year TIPS yield dropped to -0.10% on Thursday, down 21 basis points in just eight days.

This is what happens when the stock market tanks. Flight to safety.
This is what happens when the market lowers its estimate of economic performance - stocks drop and interest rates drop.
It's interesting to see how much the "break even" on the five has changed in the past several days as a result of the equity market changes. It's not steady Eddie.

Chart for the noiminal five for those interested: https://www.google.com/finance?chdnp=1& ... Y7GqAHmwQE
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by Rodc »

Doc wrote:
Rodc wrote:I confess I don't really get 5-year TIPS.

I worry about inflation in the long run much more than in the short run.

Sure I can roll over short TIPS, but easier to buy longer TIPS.
"Easy" shouldn't be a factor. (1)

The best inflation hedge would be rolling 4 wk Treasuries bills. (2) But you give up a lot of return (3) if you do that so most people go longer. The longer the term the more inflation risk so at some point one might go to TIPS instead of nominals. How far out on the yield curve you go depends on term risk whether you are using inflation protected issues or not.

For myself I am not going to tie up a large amount of money for 20 or 30 years at a historically low real yield of 1 to 1.5%. (4) But I don't buy long bonds even as part of a TBM fund based on factors described in Larry Swedroe's bond book.
1) fair enough

2) any data on how much better rolling 4 wk treasuries do for unexpected inflation vs TIPS? I'm not sure I buy the claim.

3) this is important and a factor I take into account.

4) I know we are not supposed to market time but I'm with you on this one. A rate of 1.5% is getting towards not horrible, but I have not gotten over this point for some time and so have not purchased in more TIPS for the last few years.
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by #Cruncher »

elgob.bogle in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2025389#p2025389]this post[/url] wrote:My confirmation statement indicates: "U S TREASURY INFLATION INDEX NOTE WHEN ISSUED 0% 04/15/19 04/15/14". Is Vanguard indicating that the auction will occur on April 15?
No. As shown on the Treasury Offering Announcement PDF file the auction will be April 17th.

4/15/2014 is the "Dated Date". This is the start date of the first 6 month interest period. It is also the base date for computing subsequent inflation adjustments known as index ratios. For example, the bottom of the PDF file shows that the "Reference CPI" on 4/15/2014 and 4/30/2014 are used to compute an index ratio of 1.00185 on the April 30th issue date (234.75217 / 234.31967). This index ratio will be used to inflation-adjust the accrued interest purchasers will be charged for the 15 days.
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by Doc »

Rodc wrote:2) any data on how much better rolling 4 wk treasuries do for unexpected inflation vs TIPS? I'm not sure I buy the claim.
Vanguard wrote:Expected inflation: Why T-bills lead
The high correlation of T-bills with expected inflation
rates reflects the nature of these securities—short-
term, government-guaranteed debt with Virtually no
credit risk. As T-bills are frequently considered a
"risk-free" asset, inflation expectations are often
gauged using T-bill yields
https://personal.vanguard.com/pdf/icruih.pdf

Google is your friend. :D
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by Doc »

Rodc wrote:I know we are not supposed to market time but I'm with you on this one. A rate of 1.5% is getting towards not horrible, but I have not gotten over this point for some time and so have not purchased in more TIPS for the last few years.
I'm not sure I would call it market timing. Selling one duration bond and buying another I would call market timing. Choosing the duration of a note to replace a maturing one based on current yields compared to historic norms is not the same thing. Perhaps the difference depends on whether the choice is made on yield or risk considerations. Besides my IPS tells me to do it which excuses me from calling it market timing.

Now Jack Bogle's recent "complaints" about the makeup of the BarCap Agg Index and suggestions to add intermediate corporates I would classify as market timing.
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by ralph124cf »

I have used TIPS in the past, and probably will in the future, but with the current crazy prices, not now.

I see two distinct problems with TIPS. The first is pricing. Investors seem to be pricing hyper-inflation into the bids for TIPS.

[OT comments removed by admin LadyGeek]

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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by elgob.bogle »

Thanks for the clarification & the link #Cruncher.

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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by Doc »

Maybe it's just the weekend but the data is all screwy.

Vanguard is showing an indicative yield of -0.571 which is the yield on th April 2018 note.

Schwab is showing no yield or coupon.

Fidelity doesn't even acknowledge the auction at all but does show the two t-Bills announced at the same time.

The WSJ is showing -0.434 and -0.397 for the Jan & July 2019 notes which are existing tens I think. I would have thought these would bracket the "best" estimate.)

And the Treasury constant maturity is now -0.06.

The negative yields would imply a premium at the auction. Does anyone know if there has ever been original issue Treasury sold at a premium? Or even on a reissue for that matter?
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by packer16 »

When TIPs go off for a negative yield do you still have to pay takes on the inflation protection component of the bond? If so aren't you locking a real loss via the taxes paid. I must be missing something.

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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by Rodc »

Doc wrote:
Rodc wrote:2) any data on how much better rolling 4 wk treasuries do for unexpected inflation vs TIPS? I'm not sure I buy the claim.
Vanguard wrote:Expected inflation: Why T-bills lead
The high correlation of T-bills with expected inflation
rates reflects the nature of these securities—short-
term, government-guaranteed debt with Virtually no
credit risk. As T-bills are frequently considered a
"risk-free" asset, inflation expectations are often
gauged using T-bill yields
https://personal.vanguard.com/pdf/icruih.pdf

Google is your friend. :D
Thank you.

That paper says:
By definition, “inflation risk” is generally a worry about
unexpected inflation.
Then goes on to say:
Separating inflation into expected and unexpected
components reveals important relationships between
returns on various assets and these components.
Figure 2
displays the historical correlations we found.
It confirms that Treasury bills provide returns that
tend to be positively related to expected inflation,
but unrelated to unexpected inflation. In contrast,
returns for commodity futures and Treasury Inflation-
Protected Securities (TIPS) show significant positive
correlation to unexpected inflation but are basically
unrelated to expected inflation.
In the end the paper also points out that it focuses on short term fluctuations in inflation (ie volatility in inflation) and for someone saving for retirement that is not a big issue. I would also add it primarily focuses on correlation, but only rarely on magnitude. (something that goes up precisely at 1% of inflation has a correlation of 1.0 but so what, it is not a useful hedge).

So i don't read the paper as being very useful to a normal investor and it does not answer the question of whether T-Bills or TIPS (especially held to maturity) are a better hedge for the sort of long term inflation that is the problem.

I expect that long term TIPS are rather better due to higher return and match to inflation in the end (though value may fluctuate between purchase and maturity, and will lower correlation over short time frames).
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Re: 5 yr TIPs auction announced 4/10- any takers?

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Re: 5 yr TIPs auction announced 4/10- any takers?

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Re: 5 yr TIPs auction announced 4/10- any takers?

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When TIPs go off for a negative yield do you still have to pay takes on the inflation protection component of the bond? If so aren't you locking a real loss via the taxes paid.
Well, true, in a taxable account you are not going to keep up with inflation with a 5-year TIPS. This is also very likely true with a 5-year nominal Treasury paying 1.58% over the next 5 years, or money market fund paying 0.05%, or a 5-year bank CD paying 2.0%, or even an I Bond paying 0.2% plus inflation for 5 years. Pick your poison, after taxes you won't beat inflation.

Interest rates on traditionally super-safe investments remain too low to beat inflation. That is why a lot of Bogleheads jumped on a 3% 5-year CD from Penfed offered from December to January. That one 'might' beat inflation, especially in a tax-deferred account.

There aren't any super-safe options out there with great returns. So we either 1) wait it out, or 2) keep building a ladder with moderate investments. I have to admit I am doing a combination of both.
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by bondsr4me »

hi doc
just a quick easy question for ya (at least I hope so):

when you buy your tips, treasuries, or the 4-wk treasuries to roll, do you buy direct using Treasury Direct or do you use a brokerage firm account (like VG, Fidelity, Schwab)?

thanks,

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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by Doc »

bondsr4me wrote:hi doc
just a quick easy question for ya (at least I hope so):

when you buy your tips, treasuries, or the 4-wk treasuries to roll, do you buy direct using Treasury Direct or do you use a brokerage firm account (like VG, Fidelity, Schwab)?

thanks,

don
Broker - both auction and secondary market at times. One of the reasons for using individual Treasuries either TIPS or nominals, is to have instant access to your money if you need/want to sell. Zero to buy at auction. Treasury direct is not conducive to that. At one time the cost to sell a position at TD was $65 which is way too much. The costs at brokerages even on the secondary market have also gone way down over the last several years. Unless you are buying in $100 increment TD just doesn't have much of an advantage.
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by bondsr4me »

thanks Doc...I really appreciate the helpful info.

now all I have to decide is which broker to use: VBS, Schwab, or Fidelity.

maybe some others will chime in; I always appreciate listening to what others have to say.

Thanks,

Don
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by Doc »

bondsr4me wrote:thanks Doc...I really appreciate the helpful info.

now all I have to decide is which broker to use: VBS, Schwab, or Fidelity.

maybe some others will chime in; I always appreciate listening to what others have to say.

Thanks,

Don
Of the 3:

Only VBS is showing negative yields on line.

Schwab is not showing bid quotes online and charges $25 to place a trade by phone.

Vanguard is not showing the cost adjustment on their cost tab for Amortized Bond Premium ABP that they are required to report to the IRS for 2014. In the past downloads to Quicken were unadjusted price only. I don't know if this has changed. Ask me again in a few weeks.

I think Fido acts as principal on most trades. That may means you get a firm price online.

Bid/asked spreads seem to be the same for all three. They have to competitive in the Treasury market or they would lose a whole lot of business.

I hate talking to bond desk reps (they talk too fast). Bad Schwab. I hate calculating and keeping track of ABP. Bad VBS. We don't have enough money at FIDO to facilitate having part of our bond ladder there. Bad Fido.
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by countdown »

I wanted to participate in this auction as I had a 5 year mature on the 15th, but will decline.
Bloomberg shows still negative yield tonight, and if I read chart properly, auction price at a premium?
Are others forging ahead? Curious if I'm missing something or misinterpreting....
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by elgob.bogle »

I'm still going for it! A TIPS ladder is part of my financial plan! I'm also looking at the overall portfolio, and not the return of TIPS in isolation.

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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by tipswatcher »

auction price at a premium?
This does like a certainty because the TIPS will carry a coupon rate of 0.125% and the yield at auction will be negative. That has happened for 10 consecutive 4- to 5-year TIPS auctions, and all of those were priced above par for buyers at the auction:

Image

Also, note that today's auction has early closing times, 11 am for competitive bids and 11:30 am for non-competitive.
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by Doc »

tipswatcher wrote:
auction price at a premium?
This does like a certainty because the TIPS will carry a coupon rate of 0.125% and the yield at auction will be negative. That has happened for 10 consecutive 4- to 5-year TIPS auctions, and all of those were priced above par for buyers at the auction:
I think your data is for reopenings. I didn't check them all but just looked at the dates. I think for an initial offering and negative yield the coupon will be zero and the price ~101.5.

The magic number for de minimis so that you don't have to amortize I believe is 101.25. :(

I've got an order in at both Schwab and Vanguard and am hoping that at least one of them will do the ABP calculation for us.
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by Doc »

Treasury Direct wrote:High Yield -0.213%

Unadjusted Price 101.685932


http://www.treasurydirect.gov/instit/an ... 0417_1.pdf
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by #Cruncher »

Doc wrote:I think your [tipswatcher's] data is for reopenings. I didn't check them all but just looked at the dates. I think for an initial offering and negative yield the coupon will be zero and the price ~101.5.
tipswatcher's table includes both initial auctions and reopenings. The initial ones have an April auction date and "5-Year" for Security Term. Here is a table that adds the recent auction. The coupon was 0.125% which is the smallest coupon allowed by Treasury rules on a note or bond. The price will vary depending on how negative the yield is. It ranged from 101.52% on the 4/21/2011 auction with a -0.180% yield to 107.38% on the 4/18/2013 auction with a -1.311% yield.
Doc wrote:The magic number for de minimis so that you don't have to amortize I believe is 101.25.
1.25% would be the correct de minimis amount for a 5-year issue. However, this refers to a discount, not a premium:
IRS publication 550 Original Issue Discount (OID) wrote:De minimis OID. You can treat the discount as zero if it is less than one-fourth of 1% (.0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. This small discount is known as “ de minimis ” OID.
(Note: this is a different issue than the "OID" that refers to the inflation-increase of a TIPS.)

For a premium on a taxable bond you can choose to amortize, but you aren't required to.
IRS publication 550 Bond Premium Amortization wrote:If you pay a premium to buy a bond, the premium is part of your basis in the bond. If the bond yields taxable interest, you can choose to amortize the premium. (underline added)
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Re: 5 yr TIPs auction announced 4/10- any takers?

Post by Doc »

#cruncher I'm somewhat confused. Maybe you can sort the tax speak for us. It looks like there have been subsequent rulings.
#Cruncher wrote:The coupon was 0.125% which is the smallest coupon allowed by Treasury rules on a note or bond.
I wasn't aware that there was a 1/8 minimum before but now i seems different maybe?
Internal Revenue Bulletin: 2014-6 wrote:Prior to the issuance of the temporary regulations, the IRS and the Treasury Department had received questions about an electing holder’s treatment of a taxable zero coupon debt instrument, including a Treasury bill, acquired at a premium and with a negative yield
http://www.irs.gov/irb/2014-6_IRB/ar04.html#d0e260 The words zero coupon, premium and negative yield implied the situation that occurred Thursday and I took it as allowing a zero coupon TIPS. Apparently I was incorrect and the 1/8 minimum still holds. But this is of no real consequence.
#Cruncher wrote:1.25% would be the correct de minimis amount for a 5-year issue. However, this refers to a discount, not a premium:
Internal Revenue Bulletin: 2013-12 wrote:During the consideration of the final regulations relating to TIPS issued with more than a de minimis amount of premium, the Treasury Department and the IRS received questions about the holder’s treatment of a taxable zero coupon debt instrument, including a Treasury bill, acquired at a premium and a negative yield.
http://www.irs.gov/irb/2013-12_IRB/ar05.html

So the de minimis rules also apply to TIPS apparently.

In any case for the five year TIPS auction we can elect to amortize the bond premium and in some cases deduct from the OID as well as the stated interest if any but if there is carry over in the end it is not a capital loss g=but an ordinary income offset.
The Treasury Department and the IRS, however, believe that the amount of the bond premium carry forward in this situation should be treated as a bond premium deduction under section 171(a)(1) rather than as a capital loss for the holder’s taxable year in which the sale, retirement, or other disposition occurs.
(Same bulletin.)

I can certainly be misinterpreting these bulletins. Nevertheless I intend to amortize the premium by some reasonable calculation. I am sure that the amounts are not going to be so far off to cause me any hassle with the IRS. After all it's less about the amount of tax that is due but rather when it is paid.

What I think is more of a question is 1) why the Treasury's real yield numbers were so far off from the actual and 2) why the YTM on the new issue was higher than either the Jan or July 2019 issues already outstanding. I thought the opposite was more common.
On the run securities are generally more liquid and trade at a premium to other securities.
http://en.wikipedia.org/wiki/On_the_run_(finance)

Apparently even bond professionals don't like negative yields.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
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