Thursday, February 10, 2011

30-Year TIPS Auction Announced


Term and Type of Security: 30-Year TIPS
Offering Amount: $9,000,000,000
Auction Date: February 17, 2011

I just placed my order for 1/90,000th of the total.

The current rate is now 2.22% over inflation. These long-term bonds have been hit very hard. Three months ago the rate hit a low of just 1.35%. As rates moved higher I decided to lock in my IRA at roughly 1.86%. Since bond prices move inversely to yield and in proportion to the duration, there has been significant carnage.

I'm more than willing to touch long-term TIPS with a 10' pole even if others aren't. The higher the real yield the better. I'm holding until maturity more than likely. I've yet to sell a TIPS bond before maturity and I don't see that changing.

As a side note, I saw a comedian on the TV the other day who brought up the 10' pole idea. If not touching something with a 10' pole implies that you hate it, then what does touching something with a 10' pole imply? That you love it? Probably not! He did say that perhaps you could be hugging someone while also holding a 10' pole though. In other words you could hug someone with your 10' pole. Hahaha!

That's sort of how I feel when buying TIPS. I don't consider them safe. Nothing is safe. I do consider them safer than most alternatives. Maybe that's not saying much though. Sigh.

I am not buying long-term TIPS because I necessarily expect serious inflation in the future. My primary concern is that real yields stay low and there is no way to make money off of money in the future. In other words, the era of making easy money off of money may be coming to an end. We've seen this in I-Bonds. They now pay just 0.0% over inflation. We've seen this in 5-year TIPS. We've seen this in treasury bills. We've seen this in interest bearing savings accounts (mine pays just 1.1%).

If anything, I lean deflationary right now. I'm not planning on that outcome though. I'd prefer to just lock in a reasonable rate when I see it.


Mr Slippery said...

The 10-year TIPS I (we) bought a couple of weeks ago has been crushed by the interest rate spike. I was looking at the secondary market and no other issue has been beaten down as badly. I'm not worried about it now since I plan to hold it to maturity, but I'd always prefer to have options.

Anonymous said...

There is usually an interest rate spike just before stocks and commodities fall.

See July 2007, June 2008 and last April. See also 1987.

Stagflationary Mark said...

Mr Slippery (& Anonymous),

I hear you. I've been through this before. That deflationary crash in 2008 sent TIPS yields skyrocketing. I just rode it out though. No big deal for those holding until maturity.

Everything is so momentum driven these days. When TIPS prices were rising many just assumed that they would keep rising. Now that TIPS pricing are falling many assume that they will keep falling. I would make a major wager that leverage is being applied in both directions.

Each year you hold that 10-Year TIPS will reduce the risk though. In 5 years you'll have the equivalent of a 5-year TIPS. I can't say what 5-year TIPS yields will be in 5 years, but they might not be all that high if the economy is still struggling.

For what it is worth, I'm in the camp that thinks the economy will still be struggling.

Anonymous said...

Bond speculators buy the long-dated Treasurys and sell the short-dated ones, to pocket the difference in yields. These bets represent borrowing short and lending long. They are risky. QE takes the risk out by making the odds, that the normal yield curve will invert, negligible. Note, right now we have possibly the steepest yield curve in history with near record spreads between short and long dated treasuries.

The funding and refunding requirements the Treasury is facing, and the pressure on the Fed to increase the money supply combine to make it easy for the bond speculator to move both the short and the long leg of these straddles. Remember the Fed creates money by buying T-bills. This is the collateral which they use to create money.

Regardless of how many long-dated issues the Treasury offers, bond speculators buy them even before the ink is dry on them. There is NO limit to the bond speculators' appetite for Treasury paper. They are all right as long as they can sell T-bills against them. Since there is no limit to the Fed's appetite for T-bills (that is how they increase the money supply), the bond speculators are secure on both sides.

The more currency the Fed creates, the more risk free profits bond speculators will get, which EVENTUALLY contributes to a fall in interest rates. You witnessed this in June 2008, again in April 2010 and will again soon. That is why playing long term bonds as opposed to TIPS right now may be more rewarding.

When the heat is on in risk assets, why hold commodities or stocks, when you can gamble risk free in the bond market? So grab the money, buy more bonds and sell an equal amount of bills. Because of bullish bond speculation interest rates fall, prices fall, employment falls, etc.

I think you are right Mark, to tend toward deflation and in your belief that the economy will still be struggling and the reason is largely BECAUSE of bond speculation.

I know you are NOT engaging in it through buying TIPS and holding. I guess I am GUILTY though :) At least I understand why and this whole vicious cycle may end with the eradication of ZIRP someday.

Stagflationary Mark said...


"Bond speculators buy the long-dated Treasurys and sell the short-dated ones, to pocket the difference in yields."

I agree! Bernanke is intentionally doing this to help out the banks. QE is concentrating on the short-term treasuries and leaving the long-term treasuries alone.

"I know you are NOT engaging in it through buying TIPS and holding. I guess I am GUILTY though :)"

I am mostly guilty as charged!

I am sort of engaging in it though. The same steep yield curve also exists in TIPS. I am choosing to concentrate my purchases on the long end of the curve. Even if we slide into Japan's deflationary mess, I'll be happy I did that. Could I have done better in nominal treasuries? Yes. Will I care? Not really. Earning 2% if inflation is 0% is much better for me than earning 12% if inflation is 10%. The taxes in the latter would eat me alive.

If and when interest rates someday rise it is not guaranteed that long-term interest rates will also rise. It could just be the short-term rates that rise. This would make sense if you think that QE is only trying to price control the short-term treasuries and the market overall is deciding what long-term treasuries should do.

Note that you would have been better off in TLT from 2004 to 2007 than you would have been in SHY. TLT pricing held steady and you got more interest.


Yield Curve Analysis