Strong Demand for Treasury Inflation Protected Securities or TIPS

According to a “Public Debt News release“, issued by the U.S. Department of the Treasury, more than $7 billion dollars of Treasure Inflation Protected Securities or TIPS we sold at auction today.

The Bid-to-Cover Ratio for the auction was $19,474,572,300/$7,000,002,300 or 2.78, indicating that there was strong demand for the TIPS. The 2.78 ratio is being reported by the WSJ as a record high for TIPS.

The Basic Types of Federal Government Bonds and Bills

As far as choice goes, the federal government offers an array of bonds, treasuries and other investment options to any US citizen. Of the bonds offered, the more commonly purchased are government bonds, T-bills, and I-bonds.

Thanks to Federal government’s reputation of having, “…never failed to pay its debt” government bonds are considered the safest of the bond investments. Of course, it would be quite surprising to see the federal government default on a debt when they also have the power to print more money.

These bonds are normally, “…issued in terms of 30 years and pay interest every six months until they mature”.

The cost or price of government bonds is typically whatever market rate the market “demands”, that is, what price the informed public is willing to pay. Thus the price can be any of three options; equal to the face value if the bond and market return are equal, higher if the bond offers a higher return than the market risk requires, or less if the bond is offering less than the market expects for the risk. When one feels their investments in the market are too risky and they are too venerable to a recession could always purchase these to help minimize such fears.

T-bills are another investment option the federal government sells. These bonds mature, “…in one year or less” and are always sold at a “discount from their face value”.

All profit from purchasing a T-bill comes from the difference in the face value and the actual cash amount paid for the T-bill. There are no interest payments on the T-bills.

I-bonds or inflation-indexed bonds, offer a way to “…help protect against inflation”, . In one form or another, inflation indexed bonds, “comprise over $1.5 trillion of the bond market.

By – Domenic Garbriella