Treasury 10-Year Inflation-Index Debt Sale Wins Back Investors

Investors bought the largest share of a 10-year Treasury Inflation Protected Securities sale since at least 2003 as yields at 14-month highs boosted demand.

Non-primary dealers bought about 69 percent of the $13 billion in TIPS issued yesterday, according to data going back to July 2003 that was compiled by Bloomberg. TIPS maturing in 10 years or more lost 5.4 percent this year as inflation expectations fell, according to Bank of America Merrill Lynch index data.

“Investors felt like this was meeting their support levels where they felt it was time to jump back in,” said Michael Lorizio, senior trader at Manulife Asset Management in Boston. “Digging deeper into the data really does spell this as a really solid auction.”

The government’s offering of the notes drew a high yield of negative 0.225 percent, compared with negative 0.602 percent at the March 21 offering, the biggest jump since the January 2011 sale of the maturity. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.52.

Yields on current 10-year TIPS declined two basis points, or 0.02 percentage point, to negative 0.29 percent in New York after rising to negative 0.24 percent.

Treasury volatility as measured by Bank of America Merrill Lynch’s MOVE index climbed May 22 to 65.37 from 59.76 the previous day after Federal Reserve Chairman Ben S. Bernanke told Congress the Fed may cut the pace of bond purchases at the next few meetings if policy makers see indications of sustained economic growth.

Inflation Expectations

Inflation-protected Treasuries maturing in 10 years or more are on track to lose money for the first time since 2006, when the Fed ended a two-year cycle of 17 consecutive increases to its overnight benchmark rate that boosted it to 5.25 percent, from 1 percent in 2004.

“The debate’s going on about what does this really mean,” said Chris McReynolds, head of Treasury trading at Barclays Plc, one of the 21 primary dealers obligated to participate in government bond auctions. “If people think the Fed’s taking the punchbowl away too early, that will push down inflation expectations.”

Indirect bidders, a class of investors that includes foreign central banks, bought 56.8 percent of the 10-year TIPS auctioned yesterday, the highest level since November 2010. They purchased 51.3 percent at the March sale. The average for the past 10 offerings is 44.5 percent.

Dealer Take

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 12.4 percent yesterday, versus 5.7 percent at the March auction. The average at the past 10 sales is 14.8 percent.

Primary dealers won 30.9 percent of the offering, compared with an average of 40.4 percent at the last 10 sales.

Bidding has slowed at Treasury auctions this year, with the $806 billion in debt sales attracting an average of $3 in orders to buy per dollar of debt sold, compared with a record $3.15 in 2012, according to data released by the Treasury and compiled by Bloomberg.

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