Treasury Draws Lowest Yield on Record at $10 Billion 10-Year TIPS Auction

The U.S. sold $10 billion of 10-year Treasury Inflation Protected Securities at a record low yield of 0.409 percent, suggesting investors are confident the Federal Reserve will be successful in re-inflating growth.

The previous low yield of 1.019 percent was set at a Sept. 2 auction. On Oct. 25, the U.S. sold $10 billion of five-year TIPS at a negative yield, the first time investors were willing to receive negative returns at a Treasury auction.

The central bank’s policy-setting Federal Open Market Committee said yesterday they’ll expand purchases of Treasuries at a pace of about $75 billion a month through June and “will adjust the program as needed” to reduce unemployment and avert deflation. The gap between 10-year yields on regular Treasuries and TIPS has widened to 2.18 percentage points, near the highest level in five months.

“Investors have confidence the Fed will win the battle against deflation, and create an inflationary environment,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. Simko began increasing his TIPS holdings and reducing his stake in conventional Treasury debt in October.

A Bloomberg News survey of seven of the 18 primary dealers that trade with the Fed forecast a yield of 0.372 percent at today’s offering.

Inflation-indexed notes pay interest at lower rates than nominal Treasuries on a principal amount that’s linked to the Labor Department’s consumer price index. TIPS are the only securities the Treasury will auction at a negative yield.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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