Thursday, April 21, 2011

5-Year TIPS Auction Results


Interest Rate 0-1/8%
High Yield -0.180%

Amazing. The TIPS pay 0.125% in interest and adjust for inflation but were bid up to the point they have a -0.18% yield overall.

What it means that TIPS yields are negative

In this case, if you think inflation will be higher than 2.35% on average over the next five years, the TIPS are the better investment.

It is like comparing two types of dung.

Those who bought the 5-year TIPS without at least buying the 0.0% I-Bonds first were not thinking this through.

1. I-Bonds are tax-deferred.
2. I-Bonds cannot deflate (even month to month).
3. At 0.0%, I-Bonds have a better rate.

Win, win, win.

March 12, 2011
Yield Curve Thoughts

Based on those tender instructions and the Treasury's comments about negative yields on nominal bonds, I'd be somewhat surprised if the 5-year TIPS yield is below 0% during the next initial auction on April 21, 2011. I could be reading this wrong, but 0% does seem to be the floor during an initial auction. I suppose it is possible that the bonds can have a 0% floor in an initial auction but you still need to pay a premium to get that rate. It seems unlikely to me though.

Color me somewhat surprised. In my defense, I see that they have changed the tender instructions as of April 2011. The old instructions said:

Note About TIPS: Should the accepted auction yield be 0% or less, the security will not have regular semiannual interest payments. The yield will be adjusted for inflation throughout its lifetime, thus posting changes at maturity (or sale). In this case, where the accepted auction yield is 0% or less, the interest rate will automatically be set at 0% (never anything lower) for all buyers.

See here. The note about TIPS has been removed.

This changes things a bit. There is apparently no interest rate floor on TIPS in an initial auction. Investors can bid down the real yield as far as they like. Good to know. This will make it easier to someday recreate the stagflation of the 1970s in all of its former glory if we so desire.

When I first started investing in TIPS back in 2000 I never imagined a day where investors would willingly accept negative real yields long-term. It was my thinking that the 1970s simply snuck up on investors. My mistake. Apparently it all just comes down to relative dung value.


getyourselfconnected said...

I told you we should have started our own negative return fund long ago!!! Give us 1 million we give back 999,990 rsik free! Well as risk free as a matress can be.

Mr Slippery said...

A negative rate tells us that people are more concerned about preservation than income. Current indicators show mostly benign inflation, but when you look at the US fiscal condition, it is hard not to conclude that the government will choose high inflation to meet their obligations over deflation and austerity.

FYI: $100 in nickels weighs 21.8 pounds (including a shoe box) though it feels heavier for some reason. I have completed my first unit of nickel hoarding. Base metals -- winning the future!

Stagflationary Mark said...


We could have made out like bandits! Literally. Sigh.

Mr Slippery,

It might not even take high inflation. 2% inflation with 0% yields means you lose 2% per year, every year.

My long-term inflation protected TIPS bets have been a bet on falling real yields more than anything else. It doesn't necessarily take high inflation to make that happen.

In fact, if I was positive high inflation was coming then I would be more likely to own hard assets entirely and dump dollars altogether. I'm not convinced one way or another though. Japan's real yields stink too and they've been stuck at 0% inflation for a long, long time.

Even if inflation in Japan averages 0% over the next 30 years, their real yield will still only be 2.13% for those brave souls who locked it in. That's just amazing to me.

Stagflationary Mark said...

I would also point out that the treasuries without inflation protection have been rallying too over the last decade.

Inflation isn't driving what we are seeing in the treasury markets in my opinion. It is the lack of suitable alternative investment options. Making money is simply harder now in general.

getyourselfconnected said...

The Bernake says otherwise. He has kept asset prices (oil, metals, stocks) higher than they otherwise would be in hopes we all get some benefit. Feeling the benefit yet guys?

Stagflationary Mark said...

P.S. $100 in nickels weighs 21.8 pounds (including a shoe box) though it feels heavier for some reason.

Don't get me wrong. I do not see any harm in hoarding nickels. You are guaranteed 5 cents if we turn Japanese. You will also do well if we hyperinflate perhaps. What's not to like?

Other than the weight of the shoebox of course. ;)

Stagflationary Mark said...


Feeling the benefit yet guys?

Definitely feeling the "benefit"! Brother, can I spare a few moments of your time?

getyourselfconnected said...

Benefit has always been too close to buffet for my taste :)

Stagflationary Mark said...

Why is it that lunches are often thought to be free but brunches never are?

I probably shouldn't complain. I don't really care for brunches. If they were truly free then I'd probably eat one daily. The frugal gene would make me do it as a form of torture, lol.

Stagflationary Mark said...

Speaking of free lunches...

About is a free service provided by Moody's, a leading independent provider of economic, financial, country, and industry research that helps businesses, governments, and professional investors worldwide meet their diverse planning and information needs.

June 2, 2010
Buffett Makes Excuses

Moody’s, however, was paid for their supposed ability to analyze risk. So were other ratings agencies. Their failures cost investors in mortgage-backed securities billions of dollars and helped lead to the financial crisis that nearly crippled the U.S. economy.

Oh the irony!

Charles Kiting said...

98% payout! Loosest slots in town!

Stagflationary Mark said...

You can't lose much if you don't play! ;)

Stagflationary Mark said...

To be fair, it is actually a 99.82% payout per year (unless you factor in taxes on the inflationary gains).