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Yesterday, the Financial Times website, FT.com, reported that $13 billion of 10-year Treasury inflation-protected securities were sold at a negative yield of -0.089 percent at this week’s Treasury auction.
The interest rate on these particular TIPS was 0.125 percent; investors paid a premium of $102.23 for every $100 worth of bonds. Paying the extra $2.23 pushed the yield down to -0.089 percent.
Why would otherwise rational people pay for bonds that are, on the surface, guaranteed to lose money? In a word: inflation. TIPS pay more as inflation rises, thanks to the Consumer Price Index-linked component that adjusts the principal twice per year.
Inflation won’t be going away anytime soon, but at today’s interest rates, your purchasing power may be slipping. Inflation can, of course, be a significant drain on the amount you can buy in the future with today’s dollars. To fight that, investors often use government bonds called Treasury Inflation Protected Securities, or TIPS. The inflation