Bloomberg News

Treasury 5-Year Inflation Debt Sold at Highest Yield Since 2010

August 22, 2013

The government’s $16 billion sale of five-year inflation-linked notes sold at the highest yield since 2010 amid bets that the economic recovery is strong enough for the Federal Reserve to begin withdrawing monetary stimulus.

The Treasury Inflation Protected Securities yielded negative 0.127 percent, highest yield since April, 2010, with investors wary of paying a premium to guard against the threat of rising consumer prices. The last sale, an $18 billion offering on April 18, drew a yield of negative 1.311 percent, the second-lowest on record, after the securities sold at a record negative 1.496 percent in December 2012.

“The front end of the TIPS curve is not an area where people are super excited about after the backup in rates we’ve seen,” said George Goncalves, the head of interest-rate strategy at Nomura Holdings Inc., one of the 21 primary dealers obligated to bid at government auctions. “Investors are even less worried about inflation as we get closer to tapering, because there will be less money in the system.”

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.

‘Difficult Times’

The TIPS sale had a 2.18 bid-to-cover ratio, a gauge of demand that compares the amount bid with the amount offered, matching the demand at the previous auction this April, which was the weakest since October 2008. The average at the previous 10 sales was 2.77.

“There are still difficult times ahead for TIPS, as there is caution from investors in reengaging the market fully after the big selloff we’ve seen,” said Carlos Pro, an interest-rate strategist at primary dealer Credit Suisse Group AG in New York. “There is challenging outlook for inflation, with disinflation still a risk in the U.S. And that backdrop combines with the likely September taper from the Fed.”

TIPS maturing in three to five years have lost 3.6 percent this year, according to a Bank of America Merrill Lynch Indexes. TIPS of all maturities have lost 9.4 percent in 2013, on pace for the worst loss since they were first sold in 1997. The broader Treasury market has fallen 3.8 percent, Merrill Lynch data show.

Fed Buying

Inflation expectations have plummeted this year as investors begin to price in an end to the Fed’s $85 billion monthly bond-buying program that has swelled the Fed’s balance sheet to a record $3.65 trillion. Minutes of the Fed’s last policy meeting released yesterday showed officials are comfortable with a plan to start reducing bond buying later this year if the economy improves.

The central bank will start tapering in September and end purchases in mid-2014, according to the median estimate in a Bloomberg survey of 48 economists conducted Aug. 9-13.

The Federal Open Market Committee holds its next meeting on Sept. 17-18.

The difference in yield between five-year notes and similar-maturity TIPS, a measure of trader expectations for inflation over the life of the debt, called the break-even rate, has fallen to 1.76 percentage points, down from a high for the year of 2.42 percentage points in March. The measure has averaged 2.07 percent over the past year.

The U.S. consumer-price index increased 0.2 percent in July after a 0.5 percent gain in June, according to Labor Department figures. The advance matched the median forecast of 82 economists surveyed by Bloomberg.

Bidder Participation

Indirect bidders, a class of investors that includes foreign central banks, purchased 38.2 percent of the securities. The average for the previous 10 offerings was 41.1 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 8.1 percent of the securities. The average at the past 10 sales was 8.9 percent.

Investors bid $2.89 for each dollar of the $1.345 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.

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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