Treasury Inflation Bond Demand Eases With Yields at an Auction Record Low
Demand declined at the Treasury’s auction of $9 billion in inflation-indexed bonds as investors balk at yields at record lows.
The bid-to-cover ratio for the Treasury Inflation Protected Securities, which gauges demand by comparing the amount bid with the amount offered, was 2.46, the second lowest since the security was brought back to market in 2010, and less than an average of 2.77 at the five auctions since sales resumed in February 2010.
The TIPS were still sold at a record low yield of 0.77 percent, compared with a forecast of 0.684 percent, the average estimate in a Bloomberg News survey of six of the Federal Reserve’s 21 primary dealers that are required to bid on U.S. debt sales. The previous record low of 0.999 percent came in the last sale on Oct. 20 and auction sized matched the record set in February 2011.
“It’s was a rough auction and there is no way around it,” said Michael Pond, co-head of interest-rate strategy in New York at Barclays plc, a primary dealer. “Investors just have a lower appetite for real yields as low as they are that far out the curve.” The yield curve measures the difference between yields on short- and long-term securities.
The auction “tailed” or sold at yield levels higher than where the securities were trading before the auction by seven basis points, according to Richard Gilhooly, an interest-rate strategist at Toronto-Dominion Bank’s TD Securities Inc. in New York.
Indirect bidders, a category of investors that includes foreign central banks, bought 40.6 percent of the securities, matching an average of 40.6 percent at the past five auctions.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 13.6 percent of the securities at the last sale, versus an 18.16 percent average at the past five auctions.
“Seemingly nonstop richening in the days ahead of the auction and then a last minute concession was an early warning that the market was going in too hot,” George Goncalves, head of interest-rate strategy in New York at Nomura Holdings Inc., with colleagues Stanley Sun and Ankit Sahni wrote in a note to clients. “The takedown results were average, but the very rich levels resulted in the worst tail in recent memory.”
Inflation adjusted yields have been under pressure as the Fed said it would continue to extend the average maturity of its $2.6 trillion securities portfolio, a move dubbed by traders Operation Twist and maintained its policy of reinvesting maturing housing debt into agency mortgage-backed securities.
“Real yields are rich relative to the fundamentals, but they are being distorted by the Fed, so it’s still a question of how much they can rise,” Barclays’ Pond added.
Inflation-indexed TIPS pay interest at lower rates than nominal Treasuries on a principal amount that’s adjusted based on the Labor Department’s consumer price index. TIPS have returned 2 percent this year after returning 14.1 percent in 2011, compared with 9.8 percent for conventional Treasuries, according to Bank of America Merrill Lynch indexes.
The difference between yields on U.S. 30-year notes and TIPS, a gauge of expectations for inflation during the life of the debt known as the break-even rate, was 2.40 percentage points. The average during the past decade is 2.47 percentage points.
This was the sixth 30-year TIPS offering since auctions of the security were resumed after the Treasury stopped selling them in 2001.
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