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U.S. 5-Year TIPS May Yield Negative 1.384% at Sale, Survey Says

The Treasury’s $18 billion auction of five-year inflation-indexed notes may draw a yield of negative 1.384 percent, according to the average forecast in a Bloomberg News survey of six of the Federal Reserve’s 21 primary dealers.

Bids for the Treasury Inflation Protected Securities, or TIPS, which mature in April 2018, are due by 1 p.m. New York time. The amount is the largest auction of five-year TIPS, surpassing the $16 billion sold last April.

The previous auction of the securities, a $14 billion sale on Dec. 20, drew a record low yield of negative 1.496 percent. It was the seventh-straight five-year TIPS offering with a negative yield.

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 break-even rate.

The fixed payment on five-year TIPS, known as the real yield, was pushed below zero as the rise in the CPI was greater than the yield on regular five-year U.S. notes, which fell with other Treasury yields as investors sought the safety of U.S. government debt.

December’s five-year TIPS sale had a bid-to-cover ratio, a gauge of demand that compares the amount bid with the amount offered, of 2.7, versus 3.1 at the previous auction in August. The average at the past 10 sales was 2.8.

Indirect Bidders

Indirect bidders, a class of investors that includes foreign central banks, purchased 49 percent of the securities at December’s auction, the most since October 2006. The average for the past 10 offerings was 39.2 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 10.7 percent of the securities at the December sale, compared with the 8.2 percent average at the past 10 auctions.

TIPS maturing in three to five years have lost 0.02 percent this year, according to Bank of America Merrill Lynch Indexes. TIPS of all maturities gained 7.3 percent in 2012, while the broader Treasury market rose 2.2 percent, data show.

The U.S. will sell $99 billion in nominal notes next week: $35 billion in two-year debt on April 23, the same amount of five-year securities the next day and $29 billion in seven-year Treasuries on April 25.

Primary dealers trade government securities with the Fed and are obligated to participate in Treasury auctions.

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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