Treasuries Erase Ease Gains as Demand Drops at TIPS Sale

Treasury notes erased gains as an auction of inflation-indexed notes drew the weakest demand in more than three years amid speculation that consumer prices may not rise as fast as their yields indicated following the latest monetary stimulus measures announced by the Federal Reserve.

The $13 billion 10-year issue’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.36, the lowest level since April 2009. Primary dealers, who are required to bid in U.S. auctions, ended up with 48.5 percent of the Treasury Inflation-Protected Securities, the most since the January sale and more than the average of the 10 previous auctions.

“TIPS just got too rich, too fast, and a lot of the buyers stepped back,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, one of the 21 primary dealers. “That left the dealers holding a lot of it.”

Yields on benchmark 10-year notes were little changed at 1.76 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 1.625 percent security due in August 2022 added 2/32, or 63 cents per $1,000 face amount, to 98 3/4. The yield had declined as much as five basis points, or 0.05 percentage point, before the TIPS auction.

The difference in yields between 10-year bonds and TIPS touched 2.7289 percentage points on Sept. 14, the most since May 2006. The gap, an indicator of traders’ inflation expectations known as the break-even rate, dropped today to 2.51 percent.

Record Demand

Investors have shown record demand for Treasuries at government debt auctions so far this year, bidding $3.16 for every dollar of the $1.519 trillion of notes and bonds the U.S. has sold this year. That tops the record set $3.04 last year when the Treasury sold $2.135 trillion of notes and bonds.

The TIPS were sold today at a record low negative yield of 0.75 percent, versus the average forecast of negative 0.812 percent in a Bloomberg News survey of eight primary dealers. It was the fifth consecutive sale of the notes where investors were willing to pay the U.S. to hold their principal.

Treasuries rose earlier for a fourth day as speculation the global economy is slowing fueled investor appetite for the safety of U.S. government securities. A gauge showed Philadelphia area manufacturing shrank for a fifth month and purchasing-manager indexes showed both Chinese and euro-area manufacturing contracted.

Inflation expectation had soared after the Fed said Sept. 13 that it would begin buying $40 billion of mortgage-backed securities each month until the economic recovery is well established.

‘Got Overdone’

The Fed’s preferred measure of gauging the outlook for inflation, the five-year, five-year forward break-even rate, which projects the pace of consumer price increases starting in 2017, rose to 2.88 percent on Sept. 14, the highest since August 2011. It was 2.43 percent on Aug. 31.

“People got a little caught up with the inflation risk, that it was going to be inflationary right away,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, a primary dealer. “The market got overdone last week and needed a little time to re-price.”

A preliminary index of China’s manufacturing was 47.8 for September, versus 47.6 last month, according to HSBC Holdings Plc and Markit Economics. A similar index of euro-area manufacturing was 46 this month, versus 45.1 in August, separate data showed. Readings less than 50 indicate contraction.

Slowing Growth

The Labor Department reported that more Americans than forecast filed applications for unemployment benefits last week. Jobless claims decreased by 3,000 in the week ended Sept. 15 to 382,000, department figures showed today in Washington. The median forecast of 49 economists surveyed by Bloomberg News projected 375,000.

The Fed Bank of Philadelphia’s general economic index was negative 1.9 in September, compared with minus 7.1 the previous month. The Conference Board’s index of U.S. leading economic indicators fell 0.1 percent in August, led by a decline in new orders for manufacturing, after a revised 0.5 percent increase in July.

“There’s growing sentiment that the major economies around the world are slowing down,” said David Coard, head of fixed- income trading in New York at Williams Capital Group, a brokerage for institutional investors. “That’s helping to generate a bid for Treasuries.”

Fed Bank of Minneapolis President Narayana Kocherlakota said the central bank should hold the main interest rate near zero until unemployment falls below 5.5 percent, marking the first time he has linked policy to a specific economic goal.

Inflation Targeting

“As long as the FOMC is continuing to satisfy its price stability mandate, it should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent,” Kocherlakota said today in a speech in Ironwood, Michigan, referring the policy-setting Federal Open Market Committee.

The central bank cut its target rate to virtually zero in December 2008 in the aftermath of the collapse of Lehman Brothers Holdings Inc. and the freezing of the credit markets.

Chicago Fed President Charles Evans was the first central bank official to propose calibrating monetary policy based on specific economic goals. Evans advocates holding to near-zero rates until the jobless rate falls below 7 percent or inflation reaches 3 percent.

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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