Bloomberg News

Five-Year TIPS Sale Draws Record Low Yield Amid Fed Speculation

August 23, 2012

The government’s $14 billion sale of five-year inflation-linked notes drew a record low yield a day after minutes of a Federal Reserve meeting signaled many policy makers are ready to add stimulus if the economy doesn’t improve.

The Treasury Inflation Protected Securities yielded negative 1.286 percent, less than the negative 1.25 percent forecast in a Bloomberg News survey of eight of the Fed’s 21 primary dealers. It was the sixth-straight five-year TIPS offering with a negative yield. The last sale, a $16 billion offering on April 19, drew a then-record negative 1.08 percent.

“It was strong any way you slice it,” Michael Pond, co- head of interest-rate strategy in New York at Barclays Plc, said in an e-mail. The firm is obliged as a primary dealer to bid in U.S. debt auctions. “Clearly yesterday’s Fed minutes have increased investors’ appetite for TIPS, particularly at the short end of the curve.”

The minutes of the Fed’s July 31-Aug. 1 meeting showed many policy makers said a new large-scale asset-purchase program “could provide additional support for the economic recovery,” the record showed, and that more stimulus may be needed soon.

Holders of TIPS receive an adjustment to the principal value of their securities equal to the change in the consumer price index, in addition to a fixed rate of interest that’s smaller than the interest paid to a holder of conventional debt. The difference is known as the break-even rate.

The fixed payment on five-year TIPS, known as the real yield, was pushed below zero as the rise in the CPI was greater than the yield on regular five-year U.S. notes, which fell with other Treasury yields as investors sought the safety of U.S. government debt.

Demand Gauge

Today’s TIPS sale had a bid-to-cover ratio, a gauge of demand that compares the amount bid with the amount offered, of 3.11, the highest since April 2010, versus 2.58 at the previous auction this April. The average at the past 10 sales was 2.64.

Indirect bidders, a class of investors that includes foreign central banks, purchased 34.4 percent of the securities. The average for the past 10 offerings was 36.5 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 15.2 percent of the securities, the most since August 2011. The average at the past 10 sales was 6.4 percent.

TIPS maturing in three to five years have returned 2.1 percent this year, according to a Bank of America Merrill Lynch Indexes. TIPS of all maturities have gained 4.7 percent in 2012, while the broader Treasury market has risen 1.8 percent, Merrill Lynch data show.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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


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