Clamor for U.S. Inflation-Linked Bonds Slows Before CPI Report

Hedging against the risk of inflation is no longer a bargain in the bond market.

Demand at Thursday’s $13 billion auction of U.S. Treasury Inflation-Protected Securities, or TIPS, declined from the previous sale in March. The offering attracted the lowest demand since September 2014, when oil prices were collapsing, bringing down a key measure of bond-market inflation forecasts along with them.

“We’re just simply not too wrought up about inflation expectations at the moment,” said Jim Vogel, interest-rate strategist with FTN Financial in Memphis, Tennessee.

The U.S. 10-year break-even rate, a gauge of the inflation outlook derived from the yield difference between Treasuries and index-linked securities, was at 1.87 percentage points, up from a low this year of 1.53 percent on Jan. 13. That made TIPS less attractive on Thursday.

The securities yielded 0.358 percent, above the average forecast of 0.351 percent in a survey of six of the Federal Reserve’s 22 primary dealers before the sale. Inflation-indexed notes pay interest at lower rates than nominal Treasuries with the principal amount and coupon payment adjusted based on the Labor Department’s consumer price index.

Auction Demand

The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.33, below the average of 2.48 at the past 10 sales. The auction was rated a “three” by five of the primary dealers based on a scale of one through five, with one being a failed auction and five judging the results as outstanding.

’’There was some concern that the market was beginning to doubt the Fed’s ability to get inflation back up, but that fear has dissipated a little bit,’’ said Joshua Feinman, New York-based global chief economist with Deutsche Bank Asset & Wealth Management, which oversees $1.3 trillion. But now, “most of the impact has already been priced into the market.”

The overall CPI declined during the past 12 months through April, according to the median forecast in a Bloomberg survey of economists before the Friday report. CPI minus the food and energy costs rose 1.7 percent, a separate survey shows.

“The upside will be conditional upon realized inflation starting to show up,” said Gemma Wright-Casparius, who manages the $25.6 billion Vanguard Inflation-Protected Securities Fund at Valley Forge, Pennsylvania-based Vanguard Group Inc.

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