Treasury Inflation Bets Climb to Five-Month High on Prospects for Easing
Treasury-market inflation bets rose to a five-month high as traders wagered that bond purchases by the Federal Reserve will spur consumer-price gains.
The gap between yields on U.S. 10-year notes and equivalent Treasury Inflation Protected Securities, a gauge of price expectations called the breakeven rate, widened on investor bets the Fed will succeed in sparking inflation. Still, the government’s auction of $35 billion of two-year notes drew higher-than-average demand amid speculation the central bank’s efforts won’t bring the economy back to full speed quickly.
“When the Fed tells you inflation is too low and they want it to go higher, you have to listen,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo & Co. in Milwaukee. “The TIPS market is taking them seriously.”
The yield on benchmark 10-year securities increased eight basis points, or 0.08 percentage point, to 2.643 percent at 5:14 p.m. in New York, according to BGCantor Market Data. It touched 2.6448 percent, the highest level since Sept. 21. The 2.625 percent security due in August 2020 dropped 21/32, or $6.56 per $1,000 face amount, to 99 27/32.
Two-year yields rose three basis points to 0.39 percent, versus the record low of 0.327 percent set Oct. 12. Thirty-year bond yields climbed as much as 10 basis points to 4.01 percent, the highest since Oct. 15. Treasuries overall have lost 0.02 percent this month, the first decline since March, according to a Bank of America Merrill Lynch index.
The gap between rates on 10-year notes and TIPS was 2.18 percentage points after touching 2.19 percentage points, the widest since May 18. A $10 billion sale of five-year TIPS yesterday drew a yield of minus 0.55 percent, the first negative yield at a U.S. debt sale, as investors speculated they will have positive returns when inflation picks up.
Cheap Money
Fed policy makers, who already cut interest rates almost to zero and bought $1.7 trillion of securities, are discussing more purchases of Treasuries to flood markets with cheap money to prevent stagnating prices from undermining the recovery. The strategy is called quantitative easing. The Fed meets Nov. 2-3.
The dollar gained against the euro today on speculation an increase in Fed debt purchases will spur inflation. The greenback appreciated 0.8 percent to $1.3859.
Treasuries remained lower after the government’s auction of $35 billion in two-year debt, the second of four note sales this week totaling $109 billion, drew higher-than-average demand.
The securities yielded a record-low 0.40 percent, versus the average forecast of 0.409 percent in a Bloomberg News survey of 8 of the Fed’s 18 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.43. The average at the past 10 auctions was 3.2.
Not in Next Year
“Even some of the most aggressive inflation believers out there aren’t expecting it to occur in the next year,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional Investors.
Indirect bidders, a category of investors that includes foreign central banks, bought 40 percent of the notes today, the most since June. At the September sale, they bought 39 percent. Direct bidders, non-primary dealers that place their bids directly with the Treasury, purchased 15.9 percent of the notes, also the most since June.
Path of Recovery
“It reflects continued concerns about the potential path of the recovery,” said Christian Cooper, head of U.S. dollar derivatives trading in New York at Jefferies & Co., which as a primary dealer is required to bid in Treasury auctions. “People are asking if quantitative easing will take on any meaningful improvement in the employment picture, and if it does, when does that improvement in the employment rate or in improved confidence translate into improvement for main street.”
The last two-year note auction, a $36 billion offering Sept. 27, drew a yield of 0.441 percent, the lowest then on record.
The U.S. will sell $35 billion of conventional five-year notes tomorrow and $29 billion of seven-year debt on Oct. 28.
The Fed bought $2.5 billion of Treasuries today as part of a program to reinvest principal payments on its mortgage holdings into long-term government debt. It acquired 8 Treasuries that mature from August 2021 to November 2039, the New York Fed said in a statement. The Fed has bought $60.7 billion of Treasuries since it began the program Aug. 17.
‘Tepid’ Recovery
New York Fed President William Dudley said the U.S. economic recovery is “tepid.” In the text of a speech in Rochester, New York, he repeated his view that policy makers will probably need to embark on a second round of unconventional stimulus to deal with too-low inflation and a jobless rate that’s stuck near 10 percent.
U.S. Treasury note investors were the most optimistic this week since June 2009, according to a weekly poll of clients by JPMorgan Chase & Co.
The net percentage of investors holding Treasury notes increased to 29 percent this week from 25 percent the previous week. The net figure is the difference between the percentage of long investors in Treasuries, who expect prices to increase, and the percentage of investors short Treasuries, expecting prices to decrease.
To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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