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Treasury Auctions 10-Year TIPS at Record Low Negative Yield

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Treasury Sells $15 Billion of TIPS at Record Low Negative Yield
Federal Chairman Ben S. Bernanke said in testimony before the House of Representatives yesterday that economic activity decelerated during the first half of the year, adding that policy makers are prepared to take further action as needed. Photographer: Joshua Roberts/Bloomberg

July 19 (Bloomberg) -- The Treasury sold $15 billion in 10-year inflation-indexed notes at a record negative yield as investors sought a hedge against rising consumer prices amid speculation the Federal Reserve will add more stimulus.

The Treasury Inflation Protected Securities, or TIPS, were sold at a so-called high yield of negative 0.637 percent, the fourth consecutive auction of the securities where investors were willing to pay the U.S. to hold their principal. Five-year TIPS have also been sold at negative yields at the past five auctions of the securities.

Fed Chairman Ben S. Bernanke said in testimony before the House of Representatives yesterday that economic activity decelerated during the first half of the year, adding that policy makers are prepared to take further action as needed. The central bank bought $2.3 trillion in debt in two rounds of so-called quantitative easing, beginning in November 2008, to avert a prolonged decline in prices, or deflation, and to boost the economy from the recession that ended in June 2009.

“You’re seeing additional accommodation out of all the central banks,” said Brett Rose, an interest-rate strategist in New York at Citigroup Inc., one of 21 primary dealers that are required to bid at government-debt auctions. Additional Fed stimulus this year “is a high-likelihood event,” Rose said.

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

Consumer Prices

The cost of living in the U.S. was unchanged in June, as energy prices declined. The consumer-price index climbed 1.7 percent for the 12 months ended June, matching the slowest pace since January 2011, down from 3.9 percent for the 12 months ended September 2011, the Labor Department said July 17. The so-called core measure, which excludes food and energy costs, climbed 0.2 percent.

The European Central Bank, the People’s Bank of China and the Bank of England each moved to bolster their economies on July 5 as global economic growth has shown signs of faltering.

The ECB and China’s central bank cut their benchmark borrowing costs, while the BOE raised the size of its asset-purchase program. The central banks acted two weeks after the Fed said it would extend a policy known as Operation Twist, in which it sells short-term securities and uses the proceeds to buy longer-term debt to $667 billion from $400 billion.

Auction Results

The bid-to-cover ratio for the notes, which gauges demand by comparing the amount bid with the amount offered, was 2.62, compared with an average of 2.75 at the past 10 auctions of the securities.

Indirect bidders, a category of investors that includes foreign central banks, bought 44.2 percent of the securities at the sale today, compared to an average of 40.7 percent at the past 10 auctions.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 16.1 percent of the securities, versus an 12.6 percent average at the past 10 auctions.

Every issue of inflation-indexed debt sold by the Treasury with maturities up to 2029 is trading at a negative yield. The U.S. inflation-protected debt with the highest yield is 2.125 percent bond maturing February 2042, which reached as high as 0.36 percent.

Break-Even Rate

Oil advanced to the highest level in eight weeks on rising concern that faltering stability in the Middle East will disrupt supplies from a region responsible for about one-third of world production.

“The backdrop of potential Fed easing, of crude that seems resurgent today, of commodities, is conspiring in a way to move expectations of headline inflation higher,” said Aaron Kohli, an interest-rate strategist BNP Paribas in New York, a primary dealer.

U.S. inflation-linked debt maturing in 10 or more years has returned 10.2 percent this year, compared with a 5.9 percent gain in the broader TIPS market and a 2.7 percent gain in the overall Treasury market, Bank of America Merrill Lynch indexes show.

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 2.11 percentage points. The average during the past decade is 2.15 percentage points.

“Our expectation has been that the Fed’s going to do another QE program, it’s a matter of when,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York,a primary dealer. “You have the market thinking you’re going to have 2 percent headline inflation over the next decade. That’s not exactly high.”

To contact the reporter on this story: Daniel Kruger in New York at

To contact the editor responsible for this story: Dave Liedtka at

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