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New TIPS on the Way

The Treasury plans five-year and 20-year issues to go with the original 25-year ones.

The Treasury Wednesday announced a $54 billion quarterly refunding and unveiled future plans for issuing 20-year and five-year Treasury Inflation Protected Securities, while hinting it could soon increase the size of the TIPS market.

The Treasury is continuing to keep a fairly tight rein on its TIPS issuance, relative to sales of its older, more established fixed-rate securities.

But analysts looked at the addition of the 20-year TIPS bond in July and the issue of the 5-year note planned for October as necessary steps in increasing the TIPS market, now a little more than $200 billion, for the securities that let investors keep pace with inflation.

"For the smaller investor, there's more of a market available to them, so they don't necessarily remain a buy-and-hold proposition," said Scott Pedowitz, an interest rate strategist at Commerzbank. "This will make it easier to get in and out of a TIPS position."

The benchmark 25-year TIPS yield is 4.335%, with an annual coupon of 3.625, but their relative scarcity compared to the more readily available 10-year Treasury notes, has driven prices up as inflation-conscious investors look for a hedge following years of rock-bottom rates and non-existent price pressures.

Pedowitz said the Treasury announcement that it was "revisiting" the sale of its nominal 10-year note indicates that it is paving the way for upping its issuance of TIPS as a percentage of the government debt.

But that probably won't happen until 2006, and the announcement is part of the Treasury's policy of avoiding any sudden shocks to the market, Pedowitz said. "They generally telegraph changes to maturity schedules pretty well."

While a Treasury spokeswoman said the amount of new TIPS to be sold had not yet been decided, Pedowitz said the 20-year TIPS would likely entail an initial sale of $10 billion, with two further offerings for a total of up to $30 billion, based on the recommendation of the committee that advises the Treasury on how much debt the government should issue.

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That would be in line with expectations, as would the recommendation of a similar $10 billion initial sale for the 5-year TIPS notes.

Andrew Clark, an analyst at fund tracker


, said that a greater supply would be the next step after the creation of a TIPS curve. TIPS can be purchased directly from a dealer, although

investors can also buy a mutual fund that invests in TIPS, or an exchange-traded fund, like the

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fund, which matches the TIPS index.

"Given the current appetite for TIPS, it would seem an opportune time to increase their production," Clark said. "I'm certain the Treasury is considering the mix of its issues, but if they continue to issue only a relatively small number of TIPS, and if inflation rates grow at this feverish pace, there's going to be the temptation to bid TIPS back up again."