30 yr tips auction: june 21: 1.0% yield?

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grok87
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30 yr tips auction: june 21: 1.0% yield?

Post by grok87 » Thu Jun 07, 2018 5:28 am

On June 14th the next 30 year tips auction will be announced with the auction itself on June 21st. You can start placing your orders on June 14th.

I plan to participate for my normal thrice annual amount as part of my liability matching strategy to fund part of my retirement portfolio.

Any one else planning to participate?

Cheers,
Grok
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

Dudley
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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by Dudley » Thu Jun 07, 2018 6:20 am

If the 30yr was ~2% then maybe yes. However, I'm more inclined to ladder 5yr TIPS for protection and wait the chances for better real yields at longer duration. But who knows if that will ever happen in a useful timeframe ....

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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by grok87 » Thu Jun 07, 2018 10:23 am

I feel your pain. Long term interest rates seem low by historical standards.

But the strategy you propose feels like market timing to me for an investor such as me who is interested in matching long term retirement liabilities.

And whenever I have tried to do any sort of market timing on say the equity side I have only succeeded in proving to myself that I really am bad at it. I don’t have any confidence that I would be any better at it on the fixed income side of things...
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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by Doc » Thu Jun 07, 2018 2:45 pm

Dudley wrote:
Thu Jun 07, 2018 6:20 am
If the 30yr was ~2% then maybe yes. However, I'm more inclined to ladder 5yr TIPS for protection and wait the chances for better real yields at longer duration. But who knows if that will ever happen in a useful timeframe ....
Finally somebody else besides me thinks that commiting to 1% for 30 years is a little "itchy". :beer

(I myself would probably roll tens instead of going with the 1-5 ladder but the thought is the same.)

Remember though, Grok is more concerned with maintaining the future real principal rather than getting some real yield for thirty years.

I take his "1.0% yield?" remark as an attention getter and it usually works. :D

I just re-read Grok's latest post. "But the strategy you <Dudley> propose feels like market timing to me for an investor such as me who is interested in matching long term retirement liabilities." If you don't care about the real yield but only the principal it matters not in matching those long term liabilities. Maybe I've misinterpreted Grok's previous remarks about the coupon being not very important for his goal.
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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by #Cruncher » Thu Jun 07, 2018 4:52 pm

Doc wrote:
Thu Jun 07, 2018 2:45 pm
If you don't care about the real yield but only the principal it matters not in matching those long term liabilities.
1% isn't much, but it's not "chopped liver" either. For example the cost of a $30,000 per year 30-year hypothetical [*] ladder with each bond yielding 1% would be about $126,000 less than if they all yielded 0%. The following table shows the cost of the ladder with various yields for all the bonds:

Code: Select all

Yield     Cost    Savings
-----   -------   -------
  0%    900,000 	
  1%    774,231   125,769 
  2%    671,894   102,338 
  3%    588,013    83,880 
  4%    518,761    69,252
Note how the savings diminish for each 1% point yield increase. The cost is calculated with the Excel PV function. For example
774,231 = -PV(1%, 30, 30000, 0, 0)

The threads that Grok starts for each 30-year auction often talk of "normal" or "historical" TIPS yields. For background, here are the yields for all the 30-year TIPS auctions. Scroll down to the bottom to see that the average yield (weighted by face value) is about 1.66%.

Code: Select all

Coupon     Matures     Auction     Face Value   Yield

Code: Select all

 3.625   04/15/2028   04/08/1998    8,402,158   3.740
 3.625   04/15/2028   07/08/1998    8,404,017   3.680
 3.875   04/15/2029   04/07/1999    7,350,408   3.899
 3.875   04/15/2029   10/06/1999    7,368,469   4.138
 3.875   04/15/2029   10/11/2000    5,000,084   3.953
 3.375   04/15/2032   10/10/2001    5,000,011   3.465
 2.125   02/15/2040   02/22/2010    8,000,000   2.229
 2.125   02/15/2040   08/23/2010    7,171,391   1.768
 2.125   02/15/2041   02/17/2011    9,494,449   2.190
 2.125   02/15/2041   06/23/2011    7,225,388   1.744
 2.125   02/15/2041   10/20/2011    7,266,179   0.999
 0.750   02/15/2042   02/16/2012    9,127,756   0.770
 0.750   02/15/2042   06/21/2012    7,000,025   0.520
 0.750   02/15/2042   10/18/2012    7,000,088   0.479
 0.625   02/15/2043   02/21/2013    9,000,043   0.639
 0.625   02/15/2043   06/20/2013    7,000,002   1.420
 0.625   02/15/2043   10/24/2013    7,000,017   1.330
 1.375   02/15/2044   02/20/2014    9,025,320   1.495
 1.375   02/15/2044   06/19/2014    7,000,003   1.116
 1.375   02/15/2044   10/23/2014    7,000,004   0.985
 0.750   02/15/2045   02/19/2015    9,000,002   0.842
 0.750   02/15/2045   06/18/2015    7,000,003   1.142
 0.750   02/15/2045   10/22/2015    7,000,000   1.200
 1.000   02/15/2046   02/18/2016    9,346,034   1.120
 1.000   02/15/2046   06/22/2016    5,729,409   0.905
 1.000   02/15/2046   10/20/2016    5,302,275   0.666
 0.875   02/15/2047   02/16/2017    7,970,820   0.923
 0.875   02/15/2047   06/22/2017    5,607,779   0.880
 0.875   02/15/2047   10/19/2017    5,125,070   0.908
 1.000   02/15/2048   02/15/2018    8,706,576   1.003
                                  -----------   -----
Total $000 & Weighted Avg Pct     220,623,780   1.658
* To simplify the calculation I assume thirty zero-coupon bonds maturing each year 1 to 30. For comparison I used my TIPS Ladder Builder spreadsheet to calculate the cost with real TIPS. I got a cost of $908,000 when the yield of all outstanding TIPS was set at 0% and $784,000 when it was set to 1% -- a savings of $124,000.

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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by jebmke » Thu Jun 07, 2018 4:56 pm

Dudley wrote:
Thu Jun 07, 2018 6:20 am
If the 30yr was ~2% then maybe yes.
That is my thought. I have some Tips I bought in 2008 ~ 3%. sub-2% I will stick with nominals.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by Doc » Thu Jun 07, 2018 6:58 pm

#Cruncher wrote:
Thu Jun 07, 2018 4:52 pm
1% isn't much, but it's not "chopped liver" either. For example the cost of a $30,000 per year 30-year hypothetical [*] ladder with each bond yielding 1% would be about $126,000 less than if they all yielded 0%. The following table shows the cost of the ladder ...
No argument. My base is Swedroe's data on real yield data that showed a " normal" real yield range of 2% to 3%. IIRC this data was not based on TIPS but on historic coupons vs. inflation actual data. (See Swedroe's bond book, I think.)

I have no objection to Grok's 30 year inflation protected retirement portfolio. My point is that 30 year TIPS are very expensive today and that you can get to the same place with buying tens now with the intention of rolling them when they mature.

The difference between the current yield on the ten and the thirty is obviously a consideration. But looking at a thirty year real return at historicaly low rates doesn't seem prudent when you can buy the inflation protection at a very small price today by using a ten which you intend to roll at a small premium.
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stlutz
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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by stlutz » Thu Jun 07, 2018 9:24 pm

That is my thought. I have some Tips I bought in 2008 ~ 3%. sub-2% I will stick with nominals.
Just to clarify, you would go for a 30 year nominal at 3.13% over a 30 year TIPS at 1%? Or if your objection to buying any kind of a long bond at today's rates.

More generally, haven't we long since moved past the days of 2 or 3% real rates being considered "normal"?

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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by grok87 » Fri Jun 08, 2018 6:08 am

Yup. 2-3% seems far away especially when european trips yield are close to zero or negative.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by grok87 » Fri Jun 08, 2018 6:11 am

Secondary market yield now at 0.93% so 1% at the auction is looking less likely...

If only I had bought more at the February auction to scoop up those nice 1% real yields...

Oh wait! I did!

viewtopic.php?f=10&t=240938

:)
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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by Doc » Fri Jun 08, 2018 6:44 am

stlutz wrote:
Thu Jun 07, 2018 9:24 pm
More generally, haven't we long since moved past the days of 2 or 3% real rates being considered "normal"?
Recency bias.

Has very much time elapsed since quantative easing ceased? How large is the Fed's balance sheet now? Normal or still huge? Unemployment at decade lows. Inflation to follow? Will the Fed react to inflation? Yes. What will happen to long term rate? What will Guv have to pay when debt raches 100% of GDP in 2028? What's the Euro nominal rate? Will Europeans help keep US rates down for the next 30 years by buying US Treasuries?

Do you really want to bet that none or even few of these things will happen in the next 30 years?

If you don't need the coupon Grok's 30 year TIPS ladder is the cat's meow. If you also need real, real income to meet your long term goals then rolling tens now may be a good idea. Of course you could also increase your TIPS purchases by 30% or more.

No easy answer.
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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by stlutz » Fri Jun 08, 2018 7:05 pm

What will Guv have to pay when debt raches 100% of GDP in 2028?
Japan's is 253% and they have zero nominal rates, much less zero real rates.

Different people anchor onto different periods to identify what they think is "normal". Looking back at the 80s and 90s, I kind of think that those rates were "abnormally" high because 1970s inflation was burned into everyone's minds.

If you have a security that guarantees inflation adjusted principal and a 1% inflation-adjusted positive return, I don't know that there is a fundamental economic reason to consider that "too low". There's very little risk there. The free lunch of 2-3% TIPS yields may only occur once every 20 years or so. Of course the last time we had such yields, the correct call was to back up the truck and buy.... stocks. So, when the free lunch exists, it may not even make sense to take advantage.

Disclosure: I currently only have a relatively small holding in the total TIPS fund and I won't be participating in the auction outside of my investment in said fund.

grok87
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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by grok87 » Sat Jun 09, 2018 5:54 am

stlutz wrote:
Fri Jun 08, 2018 7:05 pm
What will Guv have to pay when debt raches 100% of GDP in 2028?
Japan's is 253% and they have zero nominal rates, much less zero real rates.

Different people anchor onto different periods to identify what they think is "normal". Looking back at the 80s and 90s, I kind of think that those rates were "abnormally" high because 1970s inflation was burned into everyone's minds.

If you have a security that guarantees inflation adjusted principal and a 1% inflation-adjusted positive return, I don't know that there is a fundamental economic reason to consider that "too low". There's very little risk there. The free lunch of 2-3% TIPS yields may only occur once every 20 years or so. Of course the last time we had such yields, the correct call was to back up the truck and buy.... stocks. So, when the free lunch exists, it may not even make sense to take advantage.

Disclosure: I currently only have a relatively small holding in the total TIPS fund and I won't be participating in the auction outside of my investment in said fund.
agree.

i like your use of the word anchor. Anchoring bias is one of the cognitive biases that we humans appear to be subject to
https://en.wikipedia.org/wiki/Anchoring

the most compelling argument i have heard about the level of real interest rates is that they should be related roughly to real gdp growth. maybe a point or so less.

Japan would fit that narrative as they have low real gdp growth and low interest rates both real and nominal
https://www.google.com/search?q=japan+g ... irefox-b-1

us gdp growth is somewhat higher but still not what it used to be. this chart is a little dated but makes the point.
http://econbrowser.com/archives/2014/04 ... wth-stalls
the recent years are all below the average line.
the idea that tips yields should be 2% or better seems to be predicated on periods when real gdp growth was higher, say in the 3-4% range vs the 2%ish percent range it is in now.

now let me be clear, anything can happen. I am not ruling out the idea that we could go back to such a regime of 3-4% real gdp growth and consequently higher real tips yields. but i think it is unlikely. and of course if that happens stock returns would probably be great. so take your risk on the equity side as they say.
viewtopic.php?t=66322
:)
my long dated tips portfolio is for liability matching purposes for my retirement liabilities. I'm happy enough with 1% real yields. if real yields spike higher hopefully the equity oriented leg (risk portfolio) of my 3 legged stool will benefit.
viewtopic.php?f=10&t=245377
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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by Doc » Sat Jun 09, 2018 9:28 am

stlutz wrote:
Fri Jun 08, 2018 7:05 pm
The free lunch of 2-3% TIPS yields may only occur once every 20 years or so.
"every 20 years or so" ?

Recency bias again. TIPS have only been issued for 19 years and for about nine of those years the Fed has been active in quantitative easing which has now stopped.

"For the period 1926-2004 longer-term Treasury bonds have provided a real return of 2.4%." Swedroe and Hempen The Only Guide to a Winning Bond Strategy You'll Ever Need. First Edition 2006 p225

Another thing to take into consideration is the difference between "break even rate" and actual inflation.
grok87 wrote:
Sat Jun 09, 2018 5:54 am
my long dated tips portfolio is for liability matching purposes for my retirement liabilities. I'm happy enough with 1% real yields. if real yields spike higher hopefully the equity oriented leg (risk portfolio) of my 3 legged stool will benefit.
"... happy enough with 1% real yields ..." That's fine. But everyone doesn't have your three legged stool. And many of us would not make it in retirement with a 1% real return. We would have to take more risk. Like buying "tens" now with the expectation (hope) of rolling them into a 2.3% twenty when they mature.
stlutz wrote:
Fri Jun 08, 2018 7:05 pm
Disclosure: I currently only have a relatively small holding in the total TIPS fund and I won't be participating in the auction outside of my investment in said fund.
Like you I have a relatively small TIPS holding. I have one remaining eight from a ten year ladder with a 2% coupon which I intend to sell Tuesday. :wink:
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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by grok87 » Thu Jun 14, 2018 7:32 am

30 year tips auction will be announced today. You should be able to start placing your orders today. Current secondary market yield is at 0.93% so 1.0% for the auction may be a bit of a stretch.
Cheers,
Grok
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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by Doc » Thu Jun 14, 2018 9:11 am

For what it's worth here's a chart of the 30 year yield and the added additional yield over the ten year yield.

Image

The additional amount that you get going to 30 has really diminished in the last year or so. Change in Fed action?
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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by #Cruncher » Thu Jun 14, 2018 9:41 am

Doc wrote:
Thu Jun 14, 2018 9:11 am
For what it's worth here's a chart of the 30 year yield and the added additional yield over the ten year yield.
Good chart, Doc. Here's another that shows the flattening TIPS yield curve. This one is from the start of 2016 and simply shows the weekly yields for the 30-Year, 10-Year, and 5-Year Constant Maturity TIPS:

Image

(Click the graph to open an interactive page at the FRED web site.)

By the way, here is the Official Auction Announcement.

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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by grok87 » Thu Jun 14, 2018 5:12 pm

Thanks for the announcement.

So index factor is 1.01575 and accrued interest is $3.76 per $1000. So if the bond auctions at par one will need $1019.51 per bond.

Today’s secondary market yield is 0.93% and price is 101.8. If it auctions at today’s levels one will need $1037.79 per bond.
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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by #Cruncher » Thu Jun 14, 2018 7:22 pm

grok87 wrote:
Thu Jun 14, 2018 5:12 pm
So index factor is 1.01575 and accrued interest is $3.76 per $1000. So if the bond auctions at par one will need $1019.51 per bond.
Here is what the total cost would be for other auction yields including the $3.76 interest accrued for 4-1/2 months [1]:

Code: Select all

                  Cost per
Yield    Price  $1,000 Face

Code: Select all

0.83%   104.457   1,064.78
0.84%   104.189   1,062.06
0.85%   103.921   1,059.34
0.86%   103.655   1,056.63
0.87%   103.389   1,053.93
0.88%   103.124   1,051.24
0.89%   102.859   1,048.55
0.90%   102.596   1,045.87
0.91%   102.333   1,043.20
0.92%   102.070   1,040.54
0.93%   101.809   1,037.88 [2]
0.94%   101.548   1,035.24
0.95%   101.288   1,032.60
0.96%   101.029   1,029.96
0.97%   100.771   1,027.34
0.98%   100.513   1,024.72
0.99%   100.256   1,022.11
1.00%   100.000   1,019.51
1.01%    99.744   1,016.91
1.02%    99.489   1,014.32
1.03%    99.235   1,011.74
  1. One doesn't need to wait for the auction announcement to know the accrued interest. It can be calculated as follows:
    • Determine number of days to accrue in first interest period:
      2/15/2018 - 6/29/2018 = 134 = 13 + 31 + 30 + 31 + 29
      2/15/2018 - 8/15/2018 = 181 = 13 + 31 + 30 + 31 + 30 + 31 + 15
    • Calculate unindexed accrued interest:
      $3.70166 = 1000 * (1% / 2) * (134 / 181)
    • Apply the index ratio on the 6/29/2018 issue date
      $3.75996 = 1.01575 * 3.70166
  2. Example calculation for 0.93% yield using the Excel PRICE function:
    1,037.88 = 10 * 1.01575 * PRICE(DATE(2018, 6, 29), DATE(2048, 2, 15), 1%, 0.93%, 100, 2, 1) + 3.76

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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by grok87 » Thu Jun 14, 2018 7:53 pm

#Cruncher wrote:
Thu Jun 14, 2018 7:22 pm
grok87 wrote:
Thu Jun 14, 2018 5:12 pm
So index factor is 1.01575 and accrued interest is $3.76 per $1000. So if the bond auctions at par one will need $1019.51 per bond.
Here is what the total cost would be for other auction yields:

Code: Select all

                  Cost per
Yield    Price  $1,000 Face

Code: Select all

0.83%   104.457   1,064.78
0.84%   104.189   1,062.06
0.85%   103.921   1,059.34
0.86%   103.655   1,056.63
0.87%   103.389   1,053.93
0.88%   103.124   1,051.24
0.89%   102.859   1,048.55
0.90%   102.596   1,045.87
0.91%   102.333   1,043.20
0.92%   102.070   1,040.54
0.93%   101.809   1,037.88 [*]
0.94%   101.548   1,035.24
0.95%   101.288   1,032.60
0.96%   101.029   1,029.96
0.97%   100.771   1,027.34
0.98%   100.513   1,024.72
0.99%   100.256   1,022.11
1.00%   100.000   1,019.51
1.01%    99.744   1,016.91
1.02%    99.489   1,014.32
1.03%    99.235   1,011.74
* Example calculation for 0.93% yield using the Excel PRICE function:
1,037.88 = 10 * 1.01575 * PRICE(DATE(2018, 6, 29), DATE(2048, 2, 15), 1%, 0.93%, 100, 2, 1) + 3.76
thanks- very helpful.
Based on the above I would plan personally to have $1050 per bond available, i.e. in case the auction yield drops down to close to 0.88%
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by grok87 » Fri Jun 15, 2018 9:40 am

Wow things move fast.
Secondary market yield now at 0.90%

I think it would be prudent to allow for the possibility that the auction rate might drop to 0.85%

So using #Cruncher’s handy table you would want to have at least $1060 available per bond.
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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by Doc » Fri Jun 15, 2018 1:37 pm

grok87 wrote:
Fri Jun 15, 2018 9:40 am
So using #Cruncher’s handy table you would want to have at least $1060 available per bond.
... by settlement day which I belive is 6/29.
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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by grok87 » Mon Jun 18, 2018 9:26 pm

things move fast, secondary yield now at 0.88%. so i think it is prudent to plan for the possibility of another 5 point drop. that would mean $1065 for every tip bond you plan to purchase. That is the first row of #cruncher's table...
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by likashing » Mon Jun 18, 2018 11:47 pm

Both short term bond and TIPS protect against inflation. ~3 year brokered CDs can be had for 3.1+%. A real rate of 1.0% for 30-year TIPS is not too attractive to me.

Swedro's bond book has good explanation on when real yield on TIPS is low, it makes more sense to go short term treasury. Brokered CDs for retail investors are a win-win for me. Similar risk profile while giving more yield.

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Re: 30 yr tips auction: june 21: 1.0% yield?

Post by grok87 » Thu Jun 21, 2018 4:10 pm

Auction yield was 0.934%

The auction apparently “stopped through” (ie the auction yield was less than the secondary market yield) by about a Bp indicating there was strong demand.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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