U.S. 10-Year TIPS Yields Go Negative for First Time After Fed Rate Promise

The fixed interest payment on Treasury 10-year Treasury Inflation-Protected Securities fell into negative territory for the first time on speculation the Federal Reserve officials promise to keep benchmark interest rates at record lows through mid-2013 will spark inflation.

The yield on The yield on 10-year TPS maturing in July 2021 maturing in July 2021 touched negative 0.015 percent, according to Barclays Plc pricing, after the Fed said economic growth is “considerably slower” and discussed a range of policy tools to bolster the economy today in Washington.

“A federal funds rate kept at zero for two years or more and while inflation expectations are positive is what drove real yields into negative territory,” said Michael Pond, co-head of interest-rate strategy in New York at Barclays, one of 20 primary dealers that trade with the Fed. “This is a reflection that the real fed funds rate will basically average zero over the next 10 years.”

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. The difference is known as the breakeven rate.

Inflation in 2011 will be 3.05 percent, according to the median estimate of 59 forecasters in a Bloomberg News survey, up from 1.63 percent in 2010.

Yields on 10-year notes have declined as much as 78 basis points since July 26 as economic indicators signal more slowing of the U.S. economy and President Barack Obama and Republicans in Congress engaged in a protracted struggle to address federal budget deficits and boost the debt limit, following the Standard & Poor’s long-term ratings cut Aug. 5.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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