This is part two of the TIPS auctions series. The other posts in the series are:
- TIPS Auction Step By Step: Know the Schedule
- TIPS Auction Step By Step: Place the Order
- TIPS Auction Step By Step: Read the Results
If you are interested in TIPS but you don’t want to be bothered with auctions, you can buy TIPS in a mutual fund or ETF. See Individual TIPS Or TIPS Mutual Fund.
The Treasury Department publishes auction announcements on its website. Each announcement contains important information about the TIPS to be auctioned shortly.
Estimate the Yield
You won’t know what the yield will be until the auction is over, but you can take a guess using the current yield on existing bonds traded on the secondary market. I use the Daily Treasury Par Real Yield Curve Rates published by the Treasury Department (click on the second heading on the website). These yield charts from the Federal Reserve Bank of St. Louis contain the same information with a one-day delay: 5-year, 10-year, and 30-year.
The yield from an upcoming auction should be around the most recent reading but it can go up or down a little bit. Remember the number you’re reading is the real yield, which is above and beyond inflation during the term of the TIPS.
You have to decide whether the current yield give-or-take is a good yield for you or not. It’s impossible to predict whether the yield will go up or down if you wait.
If you decide to buy the TIPS in this auction and you’d like to get a handle on how much money you will need, you will need some data from the announcement to do the calculation.
New Issue vs. Reopening
A TIPS in the upcoming auction can be either a new issue or a reopening.
A new issue means it’s a brand new bond the market has never seen before. A reopening means it came to the market some time ago and they’re selling more of the same bond again. If it’s a reopening, it will say so in the announcement.
A difference between a new issue and a reopening is the stated interest rate or the “coupon” rate. The coupon rate on a new issue is determined by the auction. It’s set to the nearest 0.125% below the high yield in the auction or fixed to 0.125% when the resulting yield is negative. The purchase price is also adjusted accordingly. For a reopening, the coupon rate is already known. The auction will determine only the price.
Another difference between a new issue and a reopening is the inflation adjustment. Because a reopened bond has been on the market for some time, it has accumulated some inflation adjustments. A reopened bond typically costs more in nominal dollars unless its coupon is significantly below the current market yield.
Important Dates and Index Ratio
The announcement contains many data points but only these are relevant for estimating how much a bond will cost.
- Issue Date: The date you will officially own the bond.
- Maturity Date: The date they will pay you back.
- Dated Date: The date from which the interest payment will be calculated.
- Interest Rate (reopening only, not applicable to new issues): The coupon rate.
- Index Ratio: The principal adjustment factor.
Estimate Dollars Needed
Plug in the data you gathered from the announcement together with your yield estimate into my TIPS pricing spreadsheet. You will see roughly how much you will need for each bond.
Next step: Place the order if you are going to buy it.
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