Bloomberg News

Treasury Auctions 30-Year Inflation Bonds at Record Low Yield

October 18, 2012

The U.S. auction of $7 billion in 30-year inflation-indexed bonds sold at a record-low yield as investors continue to pay a premium to guard against the threat of rising consumer prices.

The Treasury Inflation Protected Securities sold today drew a yield of 0.479 percent, versus the average forecast of 0.483 percent in a Bloomberg News survey of eight of the Federal Reserve’s 21 primary dealers. The yield on the 10-year note touched a one-month high as French President Francois Hollande said before a meeting in Brussels that European leaders “are almost there” in agreeing on a program to address the region’s sovereign-debt crisis.

“The auction went well -- 30-year break-evens are cheap relative to the rest of the curve, and that makes 30-year TIPS look more attractive,” said Richard Gilhooly, an interest-rate strategist at Toronto-Dominion Bank (TD)’s TD Securities unit in New York. “There is still demand for inflation protection given the Fed’s activities. And that demand should grow, resulting in higher break-evens.”

The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 1.83 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices, the highest level since Sept. 18. The 1.625 percent note due August 2022 lost 1/8, or $1.25 per $1,000 face amount, to 98 1/8.

The yield rose 16 basis points over the previous two days, the most for a two-day period since March 14.

Yields on current 30-year bonds rose two basis points to 3.02 percent, the highest since Sept. 19.

Break-Evens

The difference in yields between 30-year bonds and TIPS, a gauge of what traders expect for inflation, have risen this year, touching 2.53 percentage points today, up from 2.13 percent in January.

The gap, known as the break-even rate, rose to 2.66 on Sept. 13 after the Federal Open Market Committee said it would begin a third round of the quantitative-easing stimulus strategy, buying $40 billion of mortgage debt every month until the economic recovery is well-established.

“The Fed pushing down nominal rates near record levels, and the belief that their accommodative policies will eventually lead to inflation down the road, has continued to buoy TIPS,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, which as a primary dealer is obligated to bid at auctions. “It’s the only point in the TIPS curve where you can buy and earn something in real terms, given the market’s view of inflation.”

Bidder Participation

TIPS pay interest at lower rates than regular Treasuries on a principal amount that’s adjusted based on the Labor Department’s consumer price index.

The Treasury Inflation Protected Securities sale’s bid-to- cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.82, compared to an average of 2.71 over the past seven auctions.

Indirect bidders, a category of investors that includes foreign central banks, purchased 49.1 percent of the bonds, compared to an average of 39.7 percent at the past seven auctions. It was the second highest percentage after February’s 55.2 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 13.2 percent, versus an average of 18.9 percent at the past 7 auctions.

TIPS have returned 6 percent this year after gaining 14 percent in 2011, according to Bank of America Merrill Lynch indexes. The broader Treasury market has returned 1.4 percent this year, compared with 9.8 percent in 2011, the indexes show.

Fed Pledge

The Fed in September extended until mid-2015 a pledge to keep its benchmark interest rate at virtually zero. Policy makers acted as unemployment, which Chairman Ben S. Bernanke has called a “grave concern,” dropped below 8 percent in September for the first time since January 2009.

The Fed is mandated by Congress to aim for price stability and maximum employment.

Treasuries extended gains earlier as jobless claims increased by 46,000 to 388,000 in the week ended Oct. 13 from a revised 342,000 the prior period that was the lowest since February 2008, Labor Department figures showed today in Washington. The median forecast of 49 economists surveyed by Bloomberg called for a rise in claims to 365,000.

The Fed bought $1.891 billion of Treasuries due from February 2036 to August 2042 as part of its program to replace $267 billion of short-term debt in its portfolio with longer- term Treasuries in an effort to reduce borrowing costs further and counter rising risks of a recession.

Europe Crisis

Treasuries pared earlier gains as European leaders met to contain the region’s debt crisis exactly three years after Greece touched off the turmoil by revealing a bigger-than- expected budget deficit. Under discussion were joint banking supervision and options for closer economic and fiscal union. Included is a proposal for pooling euro-area debt that is supported by France, Spain and Italy and rejected by German Chancellor Angela Merkel.

“I’m in favor of moving forward,” Hollande told reporters as the two-day summit began. Suggesting electoral considerations are holding Merkel back, he said Germany and France have a joint responsibility to get the euro area out of crisis and “we are almost there.”

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