TIPS Lag Behind Treasury Market Ahead of Auction

Treasury Inflation Protected Securities are lagging behind conventional U.S. government debt for a third month before the U.S. sells $15 billion of TIPS today.

Inflation notes have handed investors a 0.5 percent loss since the end of October, versus a 0.2 percent decline for the broader market, according to Bank of America Merrill Lynch indexes. The International Monetary Fund cut its 2013 growth outlook for the U.S. yesterday and the House of Representatives voted to temporarily suspend the nation’s borrowing limit.

“Inflation isn’t a concern now,” said Shinji Kunibe, chief portfolio manager for fixed-income investment at Nissay Asset Management Corp. in Tokyo, which oversees the equivalent of $58 billion. “The debt ceiling problem was merely postponed, and fiscal tightening will put downward pressure on the economy,” weighing on bond yields, he said.

Benchmark 10-year yields were little changed at 1.82 percent as of 9:48 a.m. in Tokyo, according to Bloomberg Bond Trader. The price of the 1.625 percent note due in November 2022 was 98 9/32.

The world economy will expand 3.5 percent this year, less than the 3.6 percent forecast in October, the Washington-based IMF said yesterday.

‘On Track’

In the U.S., “underlying economic conditions remain on track,” the IMF said as it reduced its forecast for the world’s largest economy to 2 percent from 2.1 percent in 2013 and raised it 0.1 percentage point to 3 percent next year.

The last six 10-year TIPS sales since January 2012 have drawn negative yields.

The difference between rates on 10-year notes and same- maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, widened to 2.55 percentage points earlier this week. It was the most since November. The average over the past decade was 2.19 percentage points.

Treasuries rose yesterday as the House voted to suspend the borrowing limit, leaving for a later date decisions on automatic spending cuts and government funding. The measure will go to the Senate, where Majority Leader Harry Reid said lawmakers will pass the bill unchanged and send it to President Barack Obama.

Global investors say the state of the U.S.’s finances is the greatest risk to the world economy, with the government within weeks of reaching its borrowing limit, according to a Bloomberg survey of investors.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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