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 primary dealers (as of November 30, 2007) 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 was 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
Spiking oil prices and talk everywhere of inflation certainly didn't hurt demand for today's $8 billion auction of 5-year inflation protected Treasury notes. Bid-to-cover for the offering was solid at 2.20 as was demand from indirect bidders who were awarded 33 percent of the offering. The stop-out rate of 0.745 percent was several basis points below the when-issued bid at the 1:00 p.m. deadline. Further increases in commodity prices are certain to raise demand for protected securities.
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