The outstanding amount of zero- coupon U.S. Treasury notes and bonds rose in February by the most in more than two years as investors bet inflation will stay low even as the Federal Reserve continues monetary stimulus.
Strips, short for separate trading of registered interest and principal securities, are created by Wall Street firms that split bonds into their face amount and individual coupon payments. The amount of strips, also known as zero-coupon debt, rose by $6.7 billion, the biggest climb on a monthly basis since September 2010, according to the data. It rose to $201 billion at the end of last month, the most since August 2011, Treasury Department data showed yesterday.
“People are doubling down on the possibility that inflation is not going to rise as quickly,” said George Goncalves, head of interest-rate strategy at Nomura Holdings Inc., one of 21 primary dealers that trade Treasuries with the Fed. “If you feel comfortable that inflation has reached a near-term high and if the Fed’s credibility remain intact, buying these long-term strips would be one way of doing it.”
Strips reached $207.5 billion in July 2011, the highest level in more than 10 years.
Thirty-year strips have lost 4.9 percent this year after returning 2.1 percent in 2012, a Bank of America Merrill Lynch index shows. The broader U.S. Treasury market lost 0.4 percent this year, after returning 2.2 percent in 2012.
An estimated $9.559 trillion of Treasury securities were eligible for stripping last month, while $9.358 trillion were held in unstripped form, Treasury data showed. In addition, $16.583 billion of formerly stripped Treasury securities were reconstituted.
U.S. consumer prices rose 1.6 percent in January from a year earlier, the Labor Department reported Feb. 21. Inflation averaged 2.5 percent over the past decade.
Fed policy makers reiterated in January the central bank will keep its benchmark interest-rate target at almost zero as long as the unemployment rate is above 6.5 percent and inflation is projected to be no more than 2.5 percent. It said it intends to keep buying bonds until there is a “substantial improvement” in the labor market. The unemployment rate is 7.9 percent.
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