Bloomberg News

U.S. Sells TIPS at Record Low Yield on Demand for Haven

December 20, 2012

The Treasury sold $14 billion in inflation-linked notes at a record-low negative yield as a stalemate in efforts to end a U.S. budget showdown threatened to push the economy into recession, spurring demand for refuge.

Yields on benchmark 10-year notes were little changed as House Speaker John Boehner said he expects to keep working on a budget plan with President Barack Obama. The House will vote on a Republican plan Obama has criticized for not seeking enough new revenue through taxes and has promised to veto. The U.S. faces $600 billion in automatic spending cuts and tax boosts starting next month if an accord isn’t reached. The sale of five-year Treasury Inflation Protected Securities drew a yield of negative 1.496 percent.

“It’s not the return, it’s the purpose,” said William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts.

The 10-year yield was little changed at 1.8 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It dropped four basis points earlier, or 0.04 percentage point, to 1.76 percent, the lowest level since Dec. 18. The 1.625 percent note maturing in November 2022 rose 1/32, or 31 cents per $1,000 face amount, to 98 14/32.

The 30-year bond yield was at 2.98 percent after sliding four basis points earlier to 2.95 percent. It climbed to a three-month high of 3.03 percent on Dec. 18.

Treasuries have returned 1.8 percent this year, set for the worst yearly performance since a 3.7 percent decline in 2009, according to a Bank of America Merrill Lynch index. The Standard & Poor’s 500 Index (SPX) of U.S. shares has gained 17 percent, including reinvested dividends.

TIPS Auction

The TIPS auction was the final of four note offerings this week and $2.153 trillion of government debt sales in 2012.

The average forecast in a Bloomberg News survey was for the inflated-indexed debt to yield negative 1.476 percent. The bid- to-cover ratio, a gauge of demand that compares the amount bid with the amount offered, was 2.7, versus 3.11 at the previous auction in August. The average at the past 10 sales was 2.73.

Indirect bidders, a class of investors that includes foreign central banks, purchased 49 percent of the securities, the most since 2006, versus an average at the past 10 sales of 36.7 percent. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 10.7 percent, compared with the 7.9 percent average at the past 10 auctions.

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.

Real Yield

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 safety.

Efforts are deteriorating to resolve the budget stalemate. The Congressional Budget Office has said the automatic tax increases and spending cuts could lead to recession next year.

“The fiscal-cliff discussion looks like it’s veering off tracks,” said Michael Franzese, senior vice president of fixed- income trading at ED&F Man Capital Markets in New York.

Until this week, Obama and Boehner were edging closer to a deal. On Dec. 17, Obama gave Boehner his latest offer, which reduced his revenue demand to $1.2 trillion from $1.4 trillion, made a concession on Social Security spending and spared households with between $250,000 and $400,000 in annual income from tax rate increases. Boehner rejected it because Obama’s spending cuts weren’t big enough. He drafted his Plan B, which would raise taxes on income exceeding $1 million and which the White House said Obama would veto.

‘Remain Hopeful’

Boehner, speaking to reporters today, accused Obama of being unwilling to stand up to other Democrats on the budget. Still, Boehner said, “I remain hopeful” a deal can be reached.

“The market is waiting for more information about the fiscal cliff,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, one of the 21 primary dealers that trade with the Federal Reserve.

Treasuries pared gains earlier after a revised reading showed third-quarter U.S. gross domestic product expanded 3.1 percent, compared with a previously estimated 2.7 percent gain. The data were released today by the Commerce Department.

The Fed bought $1.7 billion of Treasuries today due between February 2023 and May 2030 and sold $7.4 billion of debt maturing in 2015 and 2016. The transactions were part of Operation Twist, under which the central bank replaces shorter- maturity securities in its holdings with longer-dated debt to hold down borrowing costs.

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