Saturday, January 15, 2011

10-Year TIPS Auction

There's a 10-Year TIPS auction on January 20, 2011. I'll be participating.

I wondered today how the market trades TIPS just before and after the auctions. Here's what I found.

The following chart shows the difference in yield in the trading days around the auction compared to the yield on the day of the auction.

Click to enlarge.

Note that the day of the auction tends to give you the best yield (as seen in the red line in the chart above). This is an assumption I have been working off of since becoming a TIPS investor back in 2000. In a perfect world, a truly efficient market wouldn't allow this to happen though. The extra supply on auction day would already be fully priced in.

The chart below shows how you would have done as an investor by participating in the auction vs. buying on a typical day near the auction.

Click to enlarge.

There is not much data here and it is noisy. However, it does back my belief that if you want the best yield and/or the fairest price then it is probably best to participate in the auction directly and avoid the middlemen.


I will probably end up breaking my "avoid the middlemen" rule this week in regards to my IRA. It has been sitting in cash since August 26, 2010.

It is my plan to buy the 30-Year TIPS with that money.

The yield on the 30-Year TIPS was 1.59% on the day I moved to cash. It is now about 1.9%. That's good enough for me. I may lock it in this week.

Over 30 years, that 0.3% difference adds up to about 9%. Assuming rates don't plummet before I buy, that cash has treated me quite well. :)

Source Data:
TreasuryDirect: TIPS Auctions
FRB: Historical Interest Rates


Mr Slippery said...

Dude, do you know how many Fidelity day trades you could make on hot junior mining stocks with that money? :)

The only real risk I see is interest rate risk, and only if you need to sell before maturity. 30 years is a long time. If interest rates go up, then theoretically CPI is also going up to compensate you.

Anonymous said...

1.9% over inflation is pretty good indeed.


G.H. said...

I looked at a Best Buy flyer today. I offered interest free payback of any purchases over $899 provided you paid in full inside of three years.

We live in an interest free world. It makes me sick to my stomach.

If you can get anything over 0% for your money, and stay away from the Bernanke "force play" at the home plate of Wall Street, I say go for it.

Stagflationary Mark said...

Mr Slippery,

"Dude, do you know how many Fidelity day trades you could make on hot junior mining stocks with that money?"

I'm going to guess that I could do seven trades. It's just a guess though (it's assuming I stop if I vomit, lol).

Stagflationary Mark said...


If you can get anything over 0% for your money...

I'm certainly not in Ameritrade's league.

TD Ameritrade: Margin Rates

*As of December 1, 2008 the current base rate is 7.75%

The less you borrow the higher your rate. It is 9.00% if you borrow less than $10,000.

In other words, the more you borrow the more you save!

I'm sure nobody is borrowing at 9% to bet in Wall Street's casino though. That's just silly talk.

TD Ameritrade (NASDAQ: AMTD): Q1 Earnings Preview 2011

TD Ameritrade Holding Corporation (NASDAQ: AMTD), Canada’s second-largest lender...

Pay no attention to the man behind the curtain!

The company is also planning further enhancements to its mobile offering, including a new application for the iPad and will roll out three tier trading platform, which includes both web and software-based applications to better serve the range of sophistication amongst its clients.

The "range of sophistication" can be seen in the 9% margin rates I think.

Anonymous said...

I have to say, my Canadian dividend paying stocks have been treating me well. I also have CEL and NZT.

My main risk would be USD strength, and I am sort of hedged against that as it would help my business.


p.s. My uncle has 6.25% margin rates from TD Ameritrade.

Stagflationary Mark said...


"My uncle has 6.25% margin rates from TD Ameritrade."

I'm going to go out on a limb here and say that their best margin rates are reserved for those who don't technically need them.

I strongly suspect that your uncle is such a person. :)

Anonymous said...

I believe he actually used it sometimes. He recently became terminally ill with brain cancer, which is why I had to go through his affairs. I was especially worried about what a guy with brain cancer wiping out his faculties would be doing with his investments.

When the idiot lady at TD Ameritrade told me he was using all of his margin I almost flipped my wig. 10 minutes later she called back and said my uncle had access to margin lending but had not used it in many years.


Stagflationary Mark said...


I'm sorry to hear about your uncle.

I think I would have flipped my wig too had I been told that an uncle of mine had been using ALL of his margin account. Yikes!