Bond investors who are worried about the negative effects of inflation are piling into Treasury inflation protected securities and related exchange traded funds, with five-year TIPS being auctioned off at negative yields.
The Treasury’s $18 billion sale of five-year TIPS drew bids of negative 0.23% yields, reports reports Cynthia Lin for the Wall Street Journal.
TIPS investors receive an adjusted principal value of their securities equal to the change in the consumer price index, along with a fixed rate of interest that is typically smaller than interest paid to conventional debt – the difference is also known as the break-even rate.
The yield gap between the two markets increased to 2.21% from 2.14%, reflecting investors’ rising inflation expectations. Investors are more willing to pay up a premium on TIPS now to reap the benefits of higher real rates in the future.
“For historical perspective, the 10-year break-even rate of inflation was as low as 0.04% in 2009 and averaged about 2% over the past decade,” according to Morningstar analyst Abby Woodham. “When the break-even rate is below average, it suggests that TIPS may be relatively cheap compared with a Treasury with a corresponding maturity.”
The fixed payment on five-year TIPS, or the real yield, dipped below zero as the rise in the CPI outstrips yield on regular five-year notes, which has been falling due to increased safe-haven demand for Treasuries, reports Cordell Eddings for Bloomberg. [Global Tensions, Faltering U.S. Stocks Boost Safe-Haven Treasury ETFs]
The iShares TIPS Bond ETF (NYSEArca: TIP), the largest TIPS-related ETF, has an adjusted duration of 7.53 years and comes with a 4.27% 30-day SEC yield, or a 0.13% real yield after adjusting for inflation. In comparison, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has a similar duration of 7.6 years, has a 2.41% 30-day SEC yield.
TIP has gained 3.0% year-to-date.
iShares TIPS Bond ETF
For more information on Treasury inflation protected securities, visit our TIPS category.
Max Chen contributed to this article.