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-two primary dealers (as of August 2004) 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 will be 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. Why Investors Care
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Highlights
The U.S. Treasury auctioned $7 billion of 5-year TIPS today with a coupon rate of 0.875 percent and a high yield of 1.74 percent. Just prior to the auction, analysts expected this auction to go well because many bond investors are considering that future Fed chairman Ben Bernanke will be less hawkish on inflation than current chairman Alan Greenspan. However, the demand for this issue was not as strong as at the April auction: the bid-to-cover ratio fell back to 1.65 from 1.88.
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