10 (& 30) Year TIPS Auction Yields Compared to Secondary Market

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#Cruncher
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10 (& 30) Year TIPS Auction Yields Compared to Secondary Market

Post by #Cruncher » Fri May 23, 2014 3:18 pm

Many of us who buy individual TIPS probaly wonder whether it's better to buy in the secondary market at a known yield or to take our chances and buy at auction at an unknown yield. To help with this decision, I've compared the yields from 22 re-opening auctions of 10-year TIPS from 10/11/2007 thru 05/22/2014 against the closing yields reported in the secondary market for the day before the auction and the day of the auction. The auction yields are listed in the next ro right column of this web page. The secondary market yields are from WSJ Historical TIPS Quotes. I chose only the re-opening auctions so the TIPS would be outstanding and therefore have secondary market quotations the day before the auction.

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                                          ----------------- Y i e l d ------------------ 
                                            Day       At        Day     -- Auction Vs --
  Coupon     Matures      Auction Date    Before   Auction     Close    Before     Close
  ------   -----------   --------------   ------   -------     -----    ------     -----
  2.625%   2017 Jul 15   Thu 2007-10-11    2.316     2.360     2.323     0.044     0.037
  1.625%   2018 Jan 15   Thu 2008-04-10    1.168     1.250     1.228     0.082     0.022
  1.375%   2018 Jul 15   Wed 2008-10-08    2.340     2.850     2.722     0.510     0.128 <- excl from avg
  2.125%   2019 Jan 15   Tue 2009-04-07    1.526     1.589     1.560     0.063     0.029
  1.875%   2019 Jul 15   Mon 2009-10-05    1.530     1.510     1.507    (0.020)    0.003
  1.375%   2020 Jan 15   Mon 2010-04-05    1.685     1.709     1.711     0.024    (0.002)
  1.250%   2020 Jul 15   Thu 2010-09-02    1.010     1.019     1.021     0.009    (0.002)
  1.250%   2020 Jul 15   Thu 2010-11-04    0.506     0.409     0.412    (0.097)   (0.003)
  1.125%   2021 Jan 15   Thu 2011-03-24    0.973     0.920     0.941    (0.053)   (0.021)
  1.125%   2021 Jan 15   Thu 2011-05-19    0.763     0.887     0.796     0.124     0.091
  0.625%   2021 Jul 15   Thu 2011-09-22   (0.040)    0.078     0.007     0.118     0.071
  0.625%   2021 Jul 15   Thu 2011-11-17    0.015     0.099     0.009     0.084     0.090
  0.125%   2022 Jan 15   Thu 2012-03-22   (0.109)   (0.089)   (0.111)    0.020     0.022
  0.125%   2022 Jan 15   Thu 2012-05-17   (0.374)   (0.391)   (0.432)   (0.017)    0.041
  0.125%   2022 Jul 15   Thu 2012-09-20   (0.780)   (0.750)   (0.729)    0.030    (0.021)
  0.125%   2022 Jul 15   Wed 2012-11-21   (0.789)   (0.720)   (0.751)    0.069     0.031
  0.125%   2023 Jan 15   Thu 2013-03-21   (0.616)   (0.602)   (0.617)    0.014     0.015
  0.125%   2023 Jan 15   Thu 2013-05-23   (0.281)   (0.225)   (0.278)    0.056     0.053
  0.375%   2023 Jul 15   Thu 2013-09-19    0.494     0.500     0.516     0.006    (0.016)
  0.375%   2023 Jul 15   Thu 2013-11-21    0.587     0.560     0.560    (0.027)    0.000
  0.625%   2024 Jan 15   Thu 2014-03-20    0.571     0.659     0.629     0.088     0.030
  0.625%   2024 Jan 15   Thu 2014-05-22    0.329     0.339     0.302     0.010     0.037
                                          ------   -------     -----    ------     -----
         Average excl auction 10/8/2008    0.499     0.529     0.505     0.030     0.024
Of the 22 auctions, five times one would have gotten a worse yield compared to the closing secondary market yield the day before. Six times one would have done worse at the auction than buying at the closing yield the day of the auction. In the remaining 33 comparisons one would have done the same or better at the auction.

Excluding the auction that took place Oct 10, 2008 when the market was extremely volatile, on average the yield one got at the auction was 0.030% points better than the closing yield in the secondary market the day before, and 0.024% points better than the closing yield in the secondary market on the day of the auction. This difference in yield equates to about a $3 savings per $1,000 of face value. (At a yield of 0.530% the price of a 0.5% coupon 10-year bond would be 99.708 compared to a price of 100 if it were priced to yield 0.5%.)

For small investors auctions are probably even a little better compared to the secondary market. This is because, I'm pretty sure the yields reported by the WSJ are for large institutional size blocks; yields for smaller purchases would likely be a little lower. But at the Treasury auctions big and small alike get the same yield.

Edited 6/22/17 to change subject line since have added post to thread for 30-year TIPS.
Last edited by #Cruncher on Wed Jun 21, 2017 11:20 pm, edited 2 times in total.

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Ice-9
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Re: 10-Year TIPS Auction Yields Compared to Secondary Market

Post by Ice-9 » Fri May 23, 2014 3:26 pm

Thanks for crunching the numbers. I always suspected I was getting a better deal at auction than with secondary market purchases.

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Re: 10-Year TIPS Auction Yields Compared to Secondary Market

Post by Doc » Sat May 24, 2014 9:10 am

#Cruncher wrote:For small investors auctions are probably even a little better compared to the secondary market. This is because, I'm pretty sure the yields reported by the WSJ are for large institutional size blocks; yields for smaller purchases would likely be a little lower. But at the Treasury auctions big and small alike get the same yield.
I wonder how much the auction itself affects the secondary market. Throwing a large amount of new "offers" into the market would in itself lower the price and therefore increase the yield. Some of the effect you are measuring might reflect this aspect in addition to any differences in bid/ask spread between institutional and individual investors. It would be hard to get a historical handle on this unless we have a bid/ask source for 11:00 Eastern on each auction day. I'm willing to bet a Starbucks that Pimco has that data.

Personally the accretion/amortization aspects of either a secondary market purchase or a reopening far outweigh consideration of small yield differences.

Nevertheless I'm am glad that you demonstrated that the spread is not large in any case. Thanks.
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30-Year TIPS Auction Yields Compared to Secondary Market

Post by #Cruncher » Wed Jun 21, 2017 11:11 pm

I've done the same comparison as in the original post for 30-year TIPS since they were re-introduced in 2010. The auction yields are listed in the next ro right column of this web page. The secondary market yields are from WSJ Historical TIPS Quotes. I chose only the re-opening auctions so the TIPS would be outstanding and therefore have secondary market quotations the day before the auction.

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                                       ----------------  Y i e l d  ---------------
                                         Day       At      Day     -- Auction vs --
Coupon     Matures        Auction      Before   Auction   Close    Before     Close
------   ----------   --------------   ------   -------   -----    ------     -----
2.125%   2040 02 15   Mon 2010-08-23    1.768    1.768    1.759     0.000     0.009
2.125%   2041 02 15   Thu 2011-06-23    1.828    1.744    1.699    (0.084)    0.045
2.125%   2041 02 15   Thu 2011-10-20    1.018    0.999    0.974    (0.019)    0.025
0.750%   2042 02 15   Thu 2012-06-21    0.479    0.520    0.501     0.041     0.019
0.750%   2042 02 15   Thu 2012-10-18    0.478    0.479    0.452     0.001     0.027
0.625%   2043 02 15   Thu 2013-06-20    1.236    1.420    1.371     0.184     0.049
0.625%   2043 02 15   Thu 2013-10-24    1.304    1.330    1.313     0.026     0.017
1.375%   2044 02 15   Thu 2014-06-19    1.098    1.116    1.103     0.018     0.013
1.375%   2044 02 15   Thu 2014-10-23    0.922    0.985    0.957     0.063     0.028
0.750%   2045 02 15   Thu 2015-06-18    1.051    1.142    1.123     0.091     0.019
0.750%   2045 02 15   Thu 2015-10-22    1.220    1.200    1.180    (0.020)    0.020
1.000%   2046 02 15   Wed 2016-06-22    0.881    0.905    0.872     0.024     0.033
1.000%   2046 02 15   Thu 2016-10-20    0.670    0.666    0.659    (0.004)    0.007
0.875%   2047 02 15   Thu 2017-06-22    0.896    0.880    0.866    (0.016)    0.014
                                        -----    -----    -----     -----     -----
                             Average    1.061    1.082    1.059     0.022     0.023
Of the 14 auctions, five times one would have gotten a worse yield compared to the closing secondary market yield the day before. No times one would have done worse at the auction than buying at the closing yield the day of the auction. In the remaining 23 comparisons one would have done the same or better at the auction.

On average the yield one got at the auction was 0.022% points better than the closing yield in the secondary market the day before, and 0.023% points better than the closing yield in the secondary market on the day of the auction. This difference in yield equates to about a $6 savings per $1,000 of face value. (E.g., at a yield of 1.022% the price of a 1% coupon 30-year bond would be 99.433 compared to a price of 100 if it yielded 1%.)

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99.433 = PRICE(DATE(2017, 2, 15), DATE(2047, 2, 15), 1%, 1.022%, 100, 2, 1)
Edited 8 AM 6/23/2017 to add results for TIPS auction yesterday. This reduced the auction versus before average from 0.025% to 0.022% and versus day of auction close from 0.024% to 0.023%.

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