10-Year TIPS Sold at a Positive Yield for First Time Since 2011

Thursday, 18 Jul 2013 04:01 PM

 

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The U.S. sold 10-year Treasury inflation-protected securities (TIPS) at a positive yield for the first time since November 2011 with investors unwilling to pay a premium to guard against the threat of rising consumer prices.

The $15 billion in TIPS were auctioned at what’s known as a high yield of 0.384 percent, compared with a forecast of 0.399 percent, the average estimate in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers that are required to bid on U.S. debt sales. The last nine sales of the securities were at negative yields.

“The TIPS market got ahead of itself and is still too rich and has overpriced demand,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, a primary dealer. “The economy hasn’t seen inflation pressure to justify TIPS strength.”

Inflation-indexed securities rise or fall in value tracking changes in the consumer price index calculated by the Labor Department. Inflation adjustments will be added to the notes’ principal and interest coupon and be payable at maturity. Demand for the securities had surged in 2011 as yields on conventional Treasuries fell to almost record lows and investors sought a hedge against a possible rise in inflation from the Fed’s unprecedented monetary stimulus measures.

Break-Even Rates

Inflation expectations have plummeted this year as investors begin to price in an end to the Fed’s bond-buying program. Fed Chairman Ben S. Bernanke reiterated in testimony before Congress today that the central bank could end purchases next year if the economy expands as forecast.

The difference in yield between 10-year notes and similar-maturity TIPS, a measure of trader expectations for rises in consumer prices over the life of the debt called the break-even rate, was 2.14 percentage points, down from a high for the year of 2.61 percent in February.

The consumer-price index increased 0.5 percent last month, a Labor Department report showed July 16. Overall consumer prices increased 1.8 percent in the 12 months ended in June.

Inflation-protected Treasuries maturing in 10 years or more have lost about 13 percent this year, and are on track for their worst year since the securities were first issued in 1998, Bank of America Merrill Lynch index data show.

‘Dual Mandate’

The positive yield at today’s auction helped bolster demand for the securities, according to Michael Pond, head of global inflation-linked research in New York at Barclays Plc, a primary dealer.

“TIPS got to very cheap levels relative to fundamentals and are now starting to offer some value,” said Pond. “The Fed has brought the dual back to the dual mandate by increasing communication around inflation which should bolster the idea that the Fed is serious about pushing inflation up.”

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.44 compared to 2.68 for the past 10 auctions.

Indirect bidders, a class of investors that includes foreign central banks, bought 57.7 percent of the 10-year TIPS auctioned. They purchased 56.8 percent at the May sale. The average for the past 10 offerings is 47.1 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 6.9 percent, versus 12.4 percent at the May auction. The average at the past 10 sales is 12.4 percent.

Primary dealers won 35.4 percent of the offering, compared with 30.9 at the previous sale.

© Copyright 2014 Bloomberg News. All rights reserved.

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