The government is somehow managing to borrow money at what are negative interest rates right now via the Treasury Inflation-Protected Securities, or TIPS. When a TIPS matures, the investor is paid the inflation-adjusted principal or original principal, whichever is greater. Since a TIPS investor won’t receive less than the original principal, the investor’s original principal amount is protected against deflation as well. But what about risk-adjusted returns and comparative returns when these TIPS auctions go off at negative yields?

A $15 billion Treasury 10-Year TIPS auction went off today at -0.63% for the yield. Yes, NEGATIVE ZERO POINT SIXTY-THREE! What is amazing is that this appears to be the seventh straight negative yield even if one such auction went off previously at -0.75%.

The indirect bids show how strong the demand is, with that coming in at 53.3%. The risk of tying your money up for 10-years is that inflation may never really raise its head and the fake-money low-rate environment we live in now could in theory be maintained forever. The on-the-run 10-Year Treasury Note yields 1.85% today and investors just took a return of -0.63%.

For this TIPS auction “gamble” to pay off for investors over a ten-year period, the rise in rates has to come to a rise of about 200 basis points and that will have to occur in the next couple of years. While that math gets real fuzzy if you start considering how much lower the price of the 10-year Treasury Notes would drop to in market price if such a rise were to occur, the argument is still true that when investors take on negative yields today, they better be hoping for a much wider return down the road.

Maybe investors tying up their money for ten years are thinking very differently than it being a ten-year investment. Maybe they are just committing to an allocation of very short-term securities like one-year T-Bill investments without having to make the decision each year and committing to that strategy for ten years now. If that is the case, then they are closer to 0.15% or so right now, with the hope that short-term Treasury Bills will see a rise in yields at some point soon.

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