The U.S. sold $16 billion in five-year Treasury Inflation Protected Securities at a record low negative yield as investors continue to pay a premium to hedge against the threat of rising consumer prices.
The securities were auctioned at a so-called high yield of negative 1.08 percent, the fifth consecutive sale of the debt at a negative yield. 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.
Investors are willing to accept the negative returns amid concern the stimulus measures taken by policy makers and the Federal Reserve, including keeping its target borrowing rate close to zero since 2008 and buying bonds to drive down yields, will spur inflation. Consumer prices increased 2.7 percent in the 12 months ended in March, the smallest 12-month gain in a year, Labor Department figures showed April 13.
“There is still significant demand for inflation protection given the accommodative Fed,” said Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc, one of Fed’s 21 primary dealers that are required to bid at U.S. auctions. “For the largest-ever notional tips auction at the lowest-ever real yield, the Treasury has to be very pleased with these results.”
The bid-to-cover ratio for the notes, which gauges demand by comparing the amount bid with the amount offered, was 2.58, compared with an average of 2.63 at the past 10 auction of the securities, Treasury data show.
The difference between yields on U.S. 5-year notes and comparable TIPS, a gauge of expectations for inflation during the life of the debt known as the break-even rate, was 1.89 percentage points, down from a year-to-date high of 2.22 on March 14. The average during the past decade is 1.94 percentage points.
Indirect bidders, a category of investors that includes foreign central banks, bought 36 percent of the securities at the sale today, compared to an average of 35.52 percent at the past 10 auctions.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 9.1 percent of the securities, versus a 5.53 percent average at the past 10 auctions.
TIPS maturing in three to five years have returned 1.8 percent this year, according to a Bank of America Merrill Lynch index. TIPS of all maturities have gained 2.5 percent, while the broader Treasury market has lost 0.07 percent, indexes show.
“Even with the record size of the sale, 10-year notes under 2 percent and the recent flight to quality investors are still wary of inflation in the future and are looking for protection,” said Justin Lederer, an interest rate strategist in New York at primary dealer Cantor Fitzgerald LP.