Treasury Sells Inflation Notes at Record Low Negative Yield

The U.S. sold $13 billion in 10- year Treasury Inflation Protected Securities at a record low negative yield with investors willing to pay a premium to guard against the threat of rising consumer prices.

The TIPS were auctioned at a so-called high yield of negative 0.089 percent, the Treasury said today. The U.S. first sold the 10-year securities at a negative yield in January. Five-year TIPS have also been sold at negative yields at the past four auctions of the securities.

“We are continuing to see inflation expectations gather steam,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 21 primary dealers that are required to bid at the sale. “With energy prices running hot the market has priced in inflation over the next 10 years.”

The bid-to-cover ratio for the notes, which gauges demand by comparing the amount bid with the amount offered, was 2.81, compared with an average of 2.74 at the past 10 auction of the securities.

TIPS pay interest at lower rates than regular Treasuries on a principal amount that’s adjusted based on the Labor Department’s consumer price index.

The cost of living in the U.S. rose in February by the most in 10 months, reflecting a jump in gasoline. The consumer-price index climbed 0.4 percent, after increasing 0.2 percent the prior month, the Labor Department said March 16. The so-called core measure, which excludes more volatile food and energy costs, climbed 0.1 percent.

Operation Twist

Federal Reserve policy makers said March 13 that the advance in fuel costs will be temporary, and most see little risk inflation will flare out of control as unemployment exceeds 8 percent. The Fed also raised its assessment of the economy during its meeting that day.

Inflation adjusted yields have been under pressure as the Fed continues to extend the average maturity of its $2.89 trillion securities portfolio, a program dubbed by traders as Operation Twist and maintains its policy of reinvesting maturing housing debt into agency mortgage-backed securities.

“Central banks’ goals have been to make people think there is going to be inflation, and the investor community is buying into the idea that the Fed is more likely to create inflation than not,” said Richard Gilhooly, an interest-rate strategist in New York at TD Securities Inc.

Break-Even Rate

The difference between yields on U.S. 10-year notes and comparable TIPS, a gauge of expectations for inflation during the life of the debt known as the break-even rate, was 2.38 percentage points. The average during the past decade is 2.13 percentage points.

Indirect bidders, a category of investors that includes foreign central banks, bought 40.4 percent of the securities at the sale today, compared to an average of 41.6 percent at the past 10 auctions.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 21.1 percent of the securities, versus an 9.67 percent average at the past 10 auctions.

TIPS have gained 0.74 percent this year after returning 14 percent in 2011, according to Bank of America Merrill Lynch indexes. Treasuries have dropped 1.7 percent since December and gained 9.8 percent last year, the data show.

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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