## Jan 2018 TIPS Auction

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antiqueman
Posts: 459
Joined: Thu Mar 12, 2009 5:22 pm

### Jan 2018 TIPS Auction

Anyone considering buying at the 10 year tips auction next week?

Based on the yield of the current tips maturing in 2028, the yield next week should be between.50 and.60.

Thanks

auntie
Posts: 277
Joined: Mon Dec 08, 2008 12:49 pm

### Re: Jan 2018 TIPS Auction

High risk does not equal high reward. It equals high risk of no reward.

Gill
Posts: 4645
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

### Re: Jan 2018 TIPS Auction

Gill

antiqueman
Posts: 459
Joined: Thu Mar 12, 2009 5:22 pm

### Re: Jan 2018 TIPS Auction

As a follow up to my original question, will someone explain to me how the "break even " inflation rate is determined. I know determining the break even inflation rate should be simple, but for some reason I have trouble with the concept.

Thanks

FIREchief
Posts: 2684
Joined: Fri Aug 19, 2016 6:40 pm

### Re: Jan 2018 TIPS Auction

auntie wrote:
Sat Jan 13, 2018 8:53 pm
+1
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

saltycaper
Posts: 2650
Joined: Thu Apr 24, 2014 8:47 pm
Location: The Tower

### Re: Jan 2018 TIPS Auction

antiqueman wrote:
Sat Jan 13, 2018 8:56 pm
As a follow up to my original question, will someone explain to me how the "break even " inflation rate is determined. I know determining the break even inflation rate should be simple, but for some reason I have trouble with the concept.

Thanks
The breakeven inflation rate is just the rate of inflation that would cause a nominal Treasury bond to have the same return as a TIPS of equal maturity. If the nominal bond is yielding 3% and the TIPS is yielding 0.5%, the breakeven inflation rate is 2.5% (nominal yield minus TIPS yield). If inflation is less than 2.5%, the nominal bond will have a higher return. If inflation is greater than 2.5%, the TIPS will have a higher return. (Whether one should care about which security will have a higher before purchasing is a different matter.)

Trying to figure anything else from the breakeven rate, such as using it as a measure of expected inflation, gets a little hairier.

I, too, already put my order in for the upcoming auction.
Quod vitae sectabor iter?

HueyLD
Posts: 6069
Joined: Mon Jan 14, 2008 10:30 am

### Re: Jan 2018 TIPS Auction

antiqueman wrote:
Sat Jan 13, 2018 8:44 pm
Anyone considering buying at the 10 year tips auction next week?

Based on the yield of the current tips maturing in 2028, the yield next week should be between.50 and.60.
Fidelity's current YTW is 0.57% and that's usually a good estimate of the auction yield.

antiqueman
Posts: 459
Joined: Thu Mar 12, 2009 5:22 pm

### Re: Jan 2018 TIPS Auction

The breakeven inflation rate is just the rate of inflation that would cause a nominal Treasury bond to have the same return as a TIPS of equal maturity. If the nominal bond is yielding 3% and the TIPS is yielding 0.5%, the breakeven inflation rate is 2.5% (nominal yield minus TIPS yield). If inflation is less than 2.5%, the nominal bond will have a higher return. If inflation is greater than 2.5%, the TIPS will have a higher return. (Whether one should care about which security will have a higher before purchasing is a different matter.)

Trying to figure anything else from the breakeven rate, such as using it as a measure of expected inflation, gets a little hairier.

I, too, already put my order in for the upcoming auction.

Thank you saltycaper. It appear then that the estimated breakeven rate is around 2 % presently.

I do not believe that inflation will be that low over the next ten years. It seems that a lot of things are becoming more expensive.

I do have another question. When the term "break even inflation rate " is used is that referring to the CPI . I am assume its not Chained CPI.

saltycaper
Posts: 2650
Joined: Thu Apr 24, 2014 8:47 pm
Location: The Tower

### Re: Jan 2018 TIPS Auction

antiqueman wrote:
Sun Jan 14, 2018 2:27 pm

I do have another question. When the term "break even inflation rate " is used is that referring to the CPI . I am assume its not Chained CPI.
Yes, currently, the principal of a TIPS is adjusted by the Consumer Price Index for All Urban Consumers (CPI-U), not the chained CPI-U (C-CPI-U). You can read more here:

Summary of Marketable Treasury Inflation-Protected Securities
Quod vitae sectabor iter?

gilgamesh
Posts: 1102
Joined: Sun Jan 10, 2016 9:29 am

### Re: Jan 2018 TIPS Auction

The 10-year break even inflation rate has been inching up and is indeed at 2% recently

https://fred.stlouisfed.org/series/T10YIE
Last edited by gilgamesh on Sun Jan 14, 2018 7:31 pm, edited 1 time in total.

mt
Posts: 150
Joined: Sun Dec 26, 2010 11:25 am

### Re: Jan 2018 TIPS Auction

I am also building a 10 year ladder and will be placing an order next week.

antiqueman
Posts: 459
Joined: Thu Mar 12, 2009 5:22 pm

### Re: Jan 2018 TIPS Auction

Thank you to all who replied.

Saltycaper, thank you for the CPI-U breakeven inflation rate information.

HueyLD
Posts: 6069
Joined: Mon Jan 14, 2008 10:30 am

### Re: Jan 2018 TIPS Auction

The auction result just came in.

Coupon rate = 0.50%; Adjusted price per \$100 = 99.536480

https://treasurydirect.gov/instit/annce ... 0118_1.pdf

MtnBiker
Posts: 150
Joined: Sun Nov 16, 2014 4:43 pm

### Re: Jan 2018 TIPS Auction

HueyLD wrote:
Sun Jan 14, 2018 9:45 am
Fidelity's current YTW is 0.57% and that's usually a good estimate of the auction yield.
Auction yield came in at 0.548%. A bit less than expected but I guess that's the price we pay for full deflation protection.

FIREchief
Posts: 2684
Joined: Fri Aug 19, 2016 6:40 pm

### Re: Jan 2018 TIPS Auction

MtnBiker wrote:
Thu Jan 18, 2018 3:46 pm
HueyLD wrote:
Sun Jan 14, 2018 9:45 am
Fidelity's current YTW is 0.57% and that's usually a good estimate of the auction yield.
Auction yield came in at 0.548%. A bit less than expected but I guess that's the price we pay for full deflation protection.
What were you expecting? Yesterday's Treasury Real Yield Curve data indicated .53% for ten year term, so today's auction actually came in a bit higher.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

MtnBiker
Posts: 150
Joined: Sun Nov 16, 2014 4:43 pm

### Re: Jan 2018 TIPS Auction

FIREchief wrote:
Thu Jan 18, 2018 3:58 pm
MtnBiker wrote:
Thu Jan 18, 2018 3:46 pm
HueyLD wrote:
Sun Jan 14, 2018 9:45 am
Fidelity's current YTW is 0.57% and that's usually a good estimate of the auction yield.
Auction yield came in at 0.548%. A bit less than expected but I guess that's the price we pay for full deflation protection.
What were you expecting? Yesterday's Treasury Real Yield Curve data indicated .53% for ten year term, so today's auction actually came in a bit higher.
As I write this, TIPS maturing 1/15/2028 with coupon of 1.75% is offered for purchase on the secondary market at a yield of 0.571%.

FIREchief
Posts: 2684
Joined: Fri Aug 19, 2016 6:40 pm

### Re: Jan 2018 TIPS Auction

MtnBiker wrote:
Thu Jan 18, 2018 4:25 pm
FIREchief wrote:
Thu Jan 18, 2018 3:58 pm
MtnBiker wrote:
Thu Jan 18, 2018 3:46 pm
HueyLD wrote:
Sun Jan 14, 2018 9:45 am
Fidelity's current YTW is 0.57% and that's usually a good estimate of the auction yield.
Auction yield came in at 0.548%. A bit less than expected but I guess that's the price we pay for full deflation protection.
What were you expecting? Yesterday's Treasury Real Yield Curve data indicated .53% for ten year term, so today's auction actually came in a bit higher.
As I write this, TIPS maturing 1/15/2028 with coupon of 1.75% is offered for purchase on the secondary market at a yield of 0.571%.
Interesting. The ten year maturing 7/15/27 was last asking .531, so not sure why the 30 year with the higher coupon is yielding more. I thought it was lower earlier today when I checked, but I'm really not sure. This may be one of the those things that #Cruncher could explain.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

jalbert
Posts: 3692
Joined: Fri Apr 10, 2015 12:29 am

### Re: Jan 2018 TIPS Auction

MtnBiker wrote:
Thu Jan 18, 2018 4:25 pm
FIREchief wrote:
Thu Jan 18, 2018 3:58 pm
MtnBiker wrote:
Thu Jan 18, 2018 3:46 pm
HueyLD wrote:
Sun Jan 14, 2018 9:45 am
Fidelity's current YTW is 0.57% and that's usually a good estimate of the auction yield.
Auction yield came in at 0.548%. A bit less than expected but I guess that's the price we pay for full deflation protection.
What were you expecting? Yesterday's Treasury Real Yield Curve data indicated .53% for ten year term, so today's auction actually came in a bit higher.
As I write this, TIPS maturing 1/15/2028 with coupon of 1.75% is offered for purchase on the secondary market at a yield of 0.571%.
A seasoned TIP is worth less because the deflation put at maturity only sets a floor at original par, not your purchase price. Thus, such a TIP should have a higher yield than a new issue of the same term if there is accumulated positive inflation correction in the principal.
Risk is not a guarantor of return.