20-year TIPS available Tuesday, July 25
Thursday, July 20th, 2006
Categorized as: Yesterday's News (old post archive)
20-year Treasury Inflation Protected Securities (TIPS) will be available to TreasuryDirect account holders who enter orders before Tuesday, July 25. TreasuryDirect account holders have already entered orders for about $4 million worth of the securities.
This is a re-opening of the 20-year TIPS originally issued in January, so the actual term is 19 and half years. In January the TIPS were issued with a 2% interest rate, which the new bonds will also pay. However, since the 20-year TIPS rate is now about 2.5%, these TIPS will cost much less than their eventual redemption value of $1,000 – plus inflation adjustments – each.
TreasuryDirect investors won’t know the exact price they will pay until the results of the July 25 auction of these securities to large institutions is complete. All investors, large and small, will pay the same price for the bonds, which will be the lowest successful price bid in the auction.
Changes in interest rates have a magnified effect on long-terms bonds. Investors have capital gains if interest rates go down and capital losses if interest rates go up.
Even 2.5% is at the low end of historical real interest rates. Under these conditions, individual investors are better off with 5-year TIPS or Series I Savings Bonds. 5-year TIPS are available on TreasuryDirect at the end of April and October.