The Finance Buff

This is the fourth installment in my TIPS auction series. The previous posts in this series were:

• TIPS Auction Step By Step: Know the Schedule
• TIPS Auction Step By Step: Read the Announcement
• TIPS Auction Step By Step: Place Order

The auction for the 10-year TIPS is completed today. The Treasury Department publishes the official auction results on their website. The results for this auction show that the yield is 1.485%. Because this is a new issue, the coupon rate is rounded down to the nearest 0.125%, which is 1.375%. Each bond of $1,000 face value will cost $989.81282.

This is within my previous estimate of between $988.82 and $1,000. It also matches the result calculated by my TIPS pricing spreadsheet if you plug in the 1.485% yield (of course you don’t know this number until now).

The auction results also show some other interesting data points. Total $8 billion worth of bonds were sold in this auction. Total bids received were $14.6 billion. The orders from retail investors (”noncompetitive bids”) were only $88 million, which were 0.6% of the total bids or 1.1% of the total bonds sold. Yet this 1.1% of orders received the same price as what the big guys received. That is a very good deal to individual investors.

We can also see that from the Treasury Department’s point of view, selling TIPS is a hundred times more efficient than selling Savings Bonds. They were able to sell $8 billion worth of bonds in one morning. According to this news article, the total sales of savings bonds (series I and EE combined) in the last ten years were:

Fiscal Year (Oct. 1 - Sept. 30)	Sales
2007	$3.4 billion
2006	$8.3 billion
2005	$6.3 billion
2004	$7.9 billion
2003	$11.8 billion
2002	$9.8 billion
2001	$6.6 billion
2000	$5.2 billion
1999	$4.7 billion
1998	$4.8 billion
Average	$6.9 billion

If you were in charge of selling bonds at the Treasury Department and you know you can sell more TIPS in one morning than what you can sell I Bonds in an entire year, plus you don’t have to print or mail those paper bonds, what would you prefer to do? No wonder they set the rate on I-Bonds so low (currently at 0%). TIPS are a win-win for both the Treasury Department and the investors.

Next step: If you placed an order in this auction, you will receive the bonds on July 15, 2008 (Issue Date) and pay $989.81 per $1,000 face value. If you didn’t buy in this auction, a new announcement for a 20-year TIPS will come out on July 17, 2008.

Related Posts:

• TIPS Auction Step By Step: Know the Schedule
• TIPS Auction Step By Step: Place Order
• TIPS Auction Step By Step: Read the Announcement