TIPS Auction Step By Step: Read the Results

July 10, 2008 by TFB

[An updated version of this article appears in my new web site Explore Bonds, together with many other articles on investing in bonds.]

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

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.

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Comments

2 Comments on TIPS Auction Step By Step: Read the Results

  1. The Femmes Frugal on July 21, 2008 | permalink
    2.  

    I've never heard of TIPS. Does one of your posts explain the basics?

    ~Katharine

  2. TFB on July 21, 2008 | permalink
    3.  

    Katharine – This post explains the basics: TIPS: Inflation Linked Bonds. Also read Treasury Inflation Protected Securities on Bogleheads Wiki.

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