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Treasury Inflation Debt Auction Bolstered by Foreign Demand

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Aug. 22 (Bloomberg) -- The U.S. Treasury’s auction of $16 billion in five-year inflation-indexed notes attracted the second-highest demand on record from a class of investors that includes foreign central banks.

Indirect bidders bought 56.3 percent of the Treasury Inflation Protected Securities sold yesterday. That compared with an average of 44.2 percent at the past 10 sales. The notes sold at a yield of negative 0.281 percent, the least since December 2013, and below the negative 0.271 percent average forecast of five of the Federal Reserve’s 22 primary dealers in a Bloomberg News poll.

“We cheapened coming in, and investors took advantage of the lower prices,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., a primary dealer, said in a telephone interview. “As we get closer to the start of Fed rate hikes the demand for short-duration TIPS has grown relative to the longer end.”

Investors have been willing to accept negative yields on the notes since 2010 because yields on comparable maturity fixed-rate U.S. securities are close to historic lows and they receive an adjustment to the principal value based on changes in the consumer price index. Five-year Treasuries yield 1.63 percent.

The difference in yields on five-year notes and inflation-protected debt, known as the break-even rate, fell yesterday to as low as 1.87 percentage points, the least since April. The difference was 212 basis points on June 25.

‘Significant Demand’

U.S. consumer price index rose 0.1 percent from a month earlier, matching the forecast of economists surveyed by Bloomberg, after rising 0.3 percent in June, Labor Department data showed on Aug 19. Overall consumer prices gained 2 percent in the 12 months ended July, also matching forecasts, following a 2.1 percent advance the prior month.

The auction “shows deep and significant demand is still there and is likely to continue,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, one of the primary dealer obligated to bid at the auctions. “There’s more faith in near-term inflation than longer-term inflation. The market is suggesting near-term inflation is likely to be strong.”

The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.48, compared with an average of 2.6 for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 3.5 percent of the securities, the lowest since April 2011, versus a 10 percent average at the past 10 offerings.

TIPS maturing in three to five years have returned 2.1 percent this year, according to Bank of America Merrill Lynch Indexes. TIPS of all maturities gained 6.6 percent this year, while the broader Treasury market advanced 3.8 percent, the indexes show.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Greg Storey

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