Bloomberg News

TIPS Sale Draws Below-Average Demand as Inflation Concern Fades

June 20, 2013

The U.S. auction of $7 billion in 30-year Treasury Inflation Protected Securities drew the highest yield in two years as gauges of traders’ expectations for consumer prices slid to the lowest in more than a year.

Demand at yesterday’s sale fell below average as investors balked at paying a premium to guard against the threat of inflation. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.47, versus an average 2.69 over the previous nine offerings since the U.S. resumed selling the debt in 2010 after an eight-year hiatus. The Federal Reserve under Chairman Ben S. Bernanke on June 19 characterized the drop in consumer prices as transitory.

“There just isn’t any inflation pressure, and the markets aren’t buying that there will be any inflation,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 21 primary dealers that are obligated to bid at U.S. debt auctions. “There was demand, but the price adjustment was severe. It was not an easy thing to take down.”

The auction drew a yield of 1.42 percent, the highest since an offering in June 2011. The average forecast in a Bloomberg survey of six of the Fed’s 21 primary dealers was for 1.423 percent. The yield at the last offering, in February, was 0.639 percent, and the record auction low was 0.479 percent in October.

Bidder Participation

Indirect bidders, a category of investors that includes foreign central banks, purchased 60.8 percent of the notes, the most since 2010, compared with an average of 42.4 percent at the past nine auctions.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 0.4 percent, the least since 2010, versus 14 percent in February and an average of 17.7 percent at the past nine auctions.

The yield gap between 30-year Treasuries and TIPS, a gauge of traders’ expectations for consumer prices over the life of the debt that’s called the break-even rate, shrank below 2.1 percentage points for the first time since May 31, 2012. The 10-year break-even rate touched 1.98 percentage points, the least since January 2012.

U.S. consumer prices increased 1.4 percent for the 12 months that ended in May, the Labor Department reported on June 18, versus a 1.1 percent year-over-year gain reported in April that was the lowest since 2010. The Fed’s target for inflation is 2 percent.

Bernanke Outlook

Bernanke, speaking June 19 after a two-day meeting of the Federal Open Market Committee, said the Fed may begin dialing down its unprecedented bond-buying this year and end it in mid-2014 if the economy achieves the Fed’s objectives. The Fed purchases $85 billion a month of Treasuries and mortgage securities to put downward pressure on borrowing costs.

The central bank has kept its target rate for overnight lending between banks at zero to 0.25 percent since December 2008 to support the economy.

The Fed left unchanged its statement that it plans to hold its target interest rate at almost zero as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent. Officials lowered estimates for unemployment and inflation.

Policy makers are forecasting growth of as much as 2.6 percent this year and 3.5 percent in 2014.

‘Isn’t Good’

“Even though Bernanke has downplayed it, the market is looking at this as the beginning of a monetary tightening regime, and that isn’t good for TIPS,” said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh. “The more we look like we are ready to retreat out of the unchartered territory we’ve been in -- with inflation still under control -- the worse it will be for TIPS.”

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.

U.S. inflation-linked debt maturing in 10 or more years has lost 12 percent this year, compared with a 6.9 percent drop in the broader TIPS market and a 1.9 percent decline in the overall Treasury market, according to Bank of America Merrill Lynch indexes.

To contact the reporter on this story: 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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