5-Year TIPS Announcement
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| Released on
4/17/08
For
Mar 2008
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Offering Amount
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| Actual |
$
8.0
B
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CUSIP Number
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Actual
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912828HW3
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Definition
The Treasury sells inflation-indexed securities, also known as TIPS, at regularly scheduled auctions. Competitive bids at these single-price auctions determine the interest rate paid on each issue, which remains fixed. Twenty primary dealers (as of November 30, 2007) are authorized and obligated to submit competitive tenders at Treasury auctions. Dealers can hold, resell, or trade the securities with other firms. The Treasury announces the amount, date and time of the 5-year TIPS auction twice a year - in April and October. The 5-year TIPS are usually announced during the third week of April and auctioned the subsequent week. In October, TIPS are also announced during the third week of the month, but this is typically a reopening of a previously issued security. For instance, the October 2004 issue had an initial maturity of 5 1/2 years; it was reopened in April 2005 and was reopened again in October 2005. The 5-year TIPS are issued on the last business day of the month. These securities mature at mid-month; consequently, investors who purchase these securities at auction are required to pay the interest accrued between the 15th of the month and the issue date.
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Why Do Investors Care?
Individual investors can participate in Treasury auctions through a securities dealer or via the Treasury Direct program. Though the Treasury Direct program saves on brokerage commissions, commissions are often nominal and eliminate a lot of paper work and administrative hassle. Brokers facilitate the purchase and sale of Treasuries in the secondary market, which is handy for buying Treasuries at times other than scheduled auctions or with maturities other than those offered by standard new issues.
Interest rates on Treasury securities are determined in the market; the Federal Reserve does not set them. However, bond investors are sensitive to Federal Reserve policy and thus market rates will mirror policy expectations. Usually, bond market players are forward-looking and this means that interest rates on Treasury securities will move in the direction of Fed policy with a lead. As a result, one is more likely to see rising interest rates on Treasury yields during an expansion (and falling yields during economic slowdowns) in advance of policy changes by the Federal Reserve.
TIPS, inflation-indexed securities, are designed to shield investors from inflation-risk. The principal is adjusted for inflation. Instead of getting back your initial investment of $1,000, for instance, you would get $1,000 plus an additional amount tied to the inflation rate. Since there is no inflation premium on the interest rate, interest payments (and yields attached to the TIPS) are lower than for regular Treasury securities. Economists and policymakers consider the differential between yields on 5-year TIPS and regular 5-year notes to be a proxy for investors' estimate of inflation expectations.
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