Treasuries Rise as Investors Win Largest Share of TIPS Auction

Treasuries rose after investors won the largest share of 10-year inflation-indexed notes sold today at any auction since at least 2003 amid renewed debate over whether the Federal Reserve will slow monetary stimulus.

Investors bought about 69 percent of the $13 billion in Treasury Inflation Protected Securities issued, 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.

“They’ve certainly cheapened up,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “Investor demand is certainly there.”

The yield on the benchmark 10-year note fell two basis points, or 0.02 percentage point, to 2.02 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.75 percent security due May 2023 rose 7/32, or $2.19 per $1,000 face value, to 97 19/32. The rate earlier climbed to 2.07 percent, the most since March 14.

The 10-year TIPS were sold today at a yield of negative 0.225 percent, compared with a Bloomberg News forecast of negative 0.244 percent. A previous auction of $13 billion of the securities on March 21 yielded negative 0.602 percent.

The difference between yields on 10-year notes and similar-maturity TIPS was at 2.25 percentage points, at almost the 2.23 percentage points reached May 17, the least since Aug. 9. The consumer price index decreased 0.4 percent, the biggest decline since December 2008, after falling 0.2 percent in March, according to Labor Department figures released last week.

Negative Returns

Trading volume dropped by 27.5 percent to $480.1 billion from $660 billion yesterday, the highest level in data going back to 2004, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. The average daily volume for this year is $291 billion.

Bank of America Merrill Lynch’s MOVE index measuring price swings in Treasuries rose to 68.2 basis points, the highest level since November. It dropped May 9 to an all-time low of 48.87 basis points. The measure averaged 62.37 basis points during the past 12 months.

Inflation-protected Treasuries have fallen 2.8 percent, compared with a loss of 0.6 percent for fixed rate U.S. government debt, according to Bank of America Merrill Lynch index data. For the month, TIPS have declined 3.2 percent, on track for their worst monthly performance since October 2008, when they lost 8.5 percent as investor expectations for inflation collapsed in the wake of the financial crisis.

Annual Returns

The longer-term TIPS 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.

Bonds tumbled yesterday after Fed Chairman Ben S. Bernanke said the central bank may cut the pace of bond purchases at the next few meetings if policy makers see indications of sustained growth.

Before closing at the highest yield since March yesterday, yields earlier dropped as Bernanke referenced the risks associated with ending easy monetary policy.

“A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,” Bernanke said yesterday in testimony prepared for a hearing at the Joint Economic Committee of Congress in Washington.

Fed Minutes

Minutes of the Fed’s April 30-May 1 policy meeting released yesterday showed that a “number” of officials were willing to taper bond buying or quantitative easing as early as the next meeting in June should economic reports show evidence of strong and sustained growth.

The market is dealing with “a Fed confusion premium,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “We’ve seen it exercised several different times, all around the topic of QE.”

Treasuries due in a decade or more are still cheaper relative to global peers with comparable maturities, according to Bank of America Merrill Lynch indexes. Yields on Treasuries were 49 basis points higher than those in an index of other sovereign debt yesterday. As recently as March 25, the gap was at 57 basis points, the cheapest level since August 2011.

Before it's here, it's on the Bloomberg Terminal.