TIPS Auction

[youbet]

I notice that there will be a TIPS Treasury auction tomorrow, April 7th.

CUSIP: 912828JX9
Term and Type: 9-Year 9-Month TIPS
Offering Amount: $6,000,000,000
Auction Date: 04/07/2009
Issue Date: 04/15/2009
Maturity Date: 01/15/2019

This seems to be a reissue of the same bonds auctioned in January, 2 1/8% PAR and 10 years.

Any feelings about what these will actually bring?

 

[terminator]

Bloomberg shows the 10yr, 2.125% last trading at 106 6/32 for a YTM of 1.44%

Bloomberg.com: Government Bonds

 

[Maurice]

Yeah, the secondary trading in the nearest issue (or in this case the same issue) has been a reliable indicator of auction results in the past.

 

[ziggy29]

Not too compelling at or near 1.5%. I don't see many prices falling around me, so I still don't buy the deflation argument. I'm seeing prices rising as much as ever in most areas...

 

[youbet]

Not too compelling at or near 1.5%. I don't see many prices falling around me, so I still don't buy the deflation argument. I'm seeing prices rising as much as ever in most areas...

Agreed. If prices on the store shelves are any indication here in Chicago-land, talk of deflation is highly exaggerated!

I was very pleased with the outcome of both the 10 (2 1/8) and 20 (2 1/2) yr TIPS auctions in January which yielded approximately PAR followed by a quick run up of prices in the secondary market. But this re-issue doesn't look so promising.

Despite the infrequency of these auctions, I'm thinking I'll be sitting this one out.

 

[FIRE'd@51]

I was very pleased with the outcome of both the 10 (2 1/8) and 20 (2 1/2) yr TIPS auctions in January which yielded approximately PAR followed by a quick run up of prices in the secondary market. But this re-issue doesn't look so promising.

As you should be .

Just curious if you are considering selling now to take advantage of the run-up in price. It looks like you have (on paper) collected a couple of years of interest payments in less than 3 months.

 

[youbet]

As you should be .

Just curious if you are considering selling now to take advantage of the run-up in price. It looks like you have (on paper) collected a couple of years of interest payments in less than 3 months.

Well..... thinking about it I guess. Unfortunately my Jan purchases were small and intended to be the first step in my learning process concerning this type of investment. My first purchase of TIPS and my first participation in treasury auctions. So, only a few $k involved.

I'm confused about one thing going on here. Perhaps you have a comment or opinion...... If folks think deflation is on the horizon, why isn't the yield on TIPS being bid up (price of the bonds down) to compensate for the low/no anticipated CPI adjusted portion of the payout?

 

[ziggy29]

I'm confused about one thing going on here. Perhaps you have a comment or opinion...... If folks think deflation is on the horizon, why isn't the yield on TIPS being bid up (price of the bonds down) to compensate for the low/no anticipated CPI adjusted portion of the payout?

People will pay more for certain types of "safety" when they feel like they need it most.

People are paying through the nose for traditional Treasuries today because they put an abnormally high value on the safety of treasuries in this economic environment. By the same token, while we've never seen TIPS in a very high inflation environment (such the late '70s to early '80s), so far whenever market data have come in with hot inflation numbers, TIPS have rallied. Presumably this is because people will pay more for inflation protection when they think they need it most; i.e. when the market thinks inflation will be elevated for a while. Think of it as a "flight to inflation protection" similar to the standard flight to safety in conventional Treasuries.

This is why, moving forward, TIPS are probably best bought when the market is most convinced of serious deflation (last November) and best sold when the market is buying TIPS at a premium because of inflation fears.

 

[FIRE'd@51]

I'm confused about one thing going on here. Perhaps you have a comment or opinion...... If folks think deflation is on the horizon, why isn't the yield on TIPS being bid up (price of the bonds down) to compensate for the low/no anticipated CPI adjusted portion of the payout?

Well, this is only a guess on my part, but perhaps the lower demand for money (due to the weak economy) is driving down real yields, and that effect is bigger than the one you describe.

 

[youbet]

Zig, Fire'd, thanks for the comments.

If I've accomplished nothing else regarding TIP, TIPS, VPSIX, etc., during the past couple of months, I've at least gotten a basic handle on the mechanics and a feeling for historical pricing.

I'd be very happy to establish a large position (for me) of ten year TIPS with a real yield in excess on 3%. That time certainly isn't right now......

 

[ziggy29]

I'd be very happy to establish a large position (for me) of ten year TIPS with a real yield in excess on 3%. That time certainly isn't right now......

In November I bought a lot of the January 2025s and July 2016s with a real YTM of about 2.7% to 2.8%. The market value on these is up 10% since then and their currently YTM on the secondary market is less than 2%. I wouldn't buy these now, but I bought these with the full intention of holding to maturity.