Bloomberg News

Treasury 30-Year TIPS Are Attractive Before Auction, CRT Says

October 20, 2011

Oct. 20 (Bloomberg) -- A narrowing in the difference of the so-called break-even rates on 10- and 30-year U.S. inflation- linked debt may suggest that the longer-maturity securities are more attractive before today’s $7 billion auction.

“A narrowing is outside of the normal state of affairs,” David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC, said in an telephone interview today. “The narrowing of the spread is showing that there is relatively less concern for inflation on the longer end relative to 10-year TIPS. Given the Fed’s stance and eventual economic growth this is unlikely.”

The difference in yields on 30-year Treasury Inflation Protected Securities and 30-year bonds is 2.12 percentage points, compared with 1.96 percentage points between 10-year TIPS and similar maturity Treasuries. The 0.16 percentage point, or 16 basis points, gap is down from an average of about 25 basis points in the past year. Investors typically demand a higher yield premium over time because of the risk that inflation will erode the value of fixed-rate securities.

Inflation-indexed notes pay interest at lower rates than Treasuries on a principal amount that’s linked to the Labor Department’s consumer price index. TIPS have returned 12 percent this year, compared with 7.9 percent for conventional Treasuries, according to Bank of America Merrill Lynch indexes.

The Treasury will auction the $7 billion of 30-year TIPS at 1 p.m. New York time.

--Editors: Dave Liedtka, Paul Cox

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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