Bloomberg News

U.S. 10-Year TIPS Yields Top Forecast as Demand Is Below Average

November 21, 2012

The U.S. sold $13 billion in 10-year inflation-indexed notes at a higher-than-forecast yield as European officials appeared closer to reaching a debt-reduction package for Greece.

The Treasury Inflation Protected Securities sale drew a negative 0.72 yield, versus a record low of negative 0.75 percent at the September auction and the average forecast of negative 0.746 percent in a Bloomberg News survey of eight primary dealers. It was first time since November 2011 that the yield at the sale wasn’t a record low and the sixth consecutive sale of the notes where investors were willing to pay the U.S. to hold their principal.

“Inflation doesn’t seem to be a problem anytime soon,” said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, one of the 21 primary dealers that are obligated to bid at government bond sales.

The gap in 10-year yields between Treasury Inflation- Protected Securities and conventional U.S. government securities was little changed at 2.40 percent. The gap, known as the breakeven rate of inflation, indicates the pace of increases in consumer prices traders expect during the life of the securities.

Yield Shift

Yields on 10-year TIPS rose to negative 0.76 percent after the auction from as low as negative 0.82 percent earlier today, according to Bloomberg Bond Trader prices. The yields haven’t closed above zero this year.

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 auction’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.52, higher than the 2.36 at the Sept. 20 offering, while below the 2.72 average in the previous 10 sales.

Indirect bidders, a category of investors that includes foreign central banks, purchased 48.3 percent of the notes, compared to an average of 40 percent at the past 10 auctions.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 10.4 percent, versus an average of 14 percent at the past 10 auctions.

European finance ministers said a further meeting on Greece had been arranged for Nov. 26 and that only “technical problems” are holding up a deal.

The U.S. first sold 10-year TIPS at a negative yield in January. Since then, their yields have progressively grown more negative.

U.S. inflation-linked debt maturing in 10 or more years has returned 11.9 percent this year, compared with a 7.2 percent gain in the broader TIPS market and a 2.4 percent advance in the overall Treasury market, according to Bank of America Merrill Lynch indexes.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

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


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