Treasury Inflation Bond Demand Jumps on Fed Inflation ConcernDaniel Kruger
Treasury’s sale of $7 billion in inflation-indexed 30-year bonds attracted the most demand in a year as speculation that the Federal Reserve’s $85 billion a month of bond purchases will continue through March spurred demand for inflation protection.
The sale’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.76, versus an average of 2.67 at the 10 previous auctions since 2010. The bonds were sold yesterday at a yield of 1.33 percent, compared with the two-year high of 1.42 percent at the June 20 offering and an average estimate of 1.359 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers.
The gap in 30-year yields between Treasury Inflation-Protected Securities and non-indexed debt, which represents the bond market’s prediction for the average inflation rate during the life of the debt, was 2.31 percentage points, compared with a 10-year average of 2.49 percentage points. The spread reach an 18-month low of 2.11 percentage points June 20 amid speculation the Fed was preparing to cut back its bond purchases.
“There’s a lot of risk that the Fed could overshoot and cause a pick-up in inflation at some point, and the market’s not priced for that risk,” said Michael Pond, head of global inflation-linked research at Barclays Plc, one of the primary dealers that are required to bid at U.S. government bond auctions.
The 30-year TIPS sale was the first of longer-term Treasury coupon securities since an Oct. 16 agreement was reached between Democrats and Republicans to end a partial government shutdown and suspend the U.S. $16.7 trillion debt limit through Feb. 7.
“There’s been money on the sidelines in this product for a while, and it’s possible we got some money to come in because it was cheap relative to other assets,” said Robert Tzucker, a TIPS trader in New York at Credit Suisse Group AG, a primary dealer. “Supply was weighing on the market. Now that it’s over and we had good demand” breakeven rates have the potential to rise. “We’ve had a lot of the QE start happening again.”
Inflation-protected Treasuries maturing in 10 years or more have lost about 12.1 percent this year, and are on track for their worst year since the securities were first issued in 1998, Bank of America Merrill Lynch index data show.
All TIPS have lost 6.6 percent this year after returning 7.3 percent in 2012, according to Bank of America Merrill Lynch’s U.S. Inflation-Linked Treasury Index. The broader Treasury market has fallen 1.8 percent this year, compared with a 2.2 percent gain in 2012, the indexes show.
Fed officials surprised financial markets last month when they failed to reduce their pace of bond purchases at end of their meeting Sept. 17-18. Economists predict the Fed will maintain the current pace of bond purchases until March, according to a Bloomberg survey conducted on Oct. 17-18.
Direct bidders at yesterday’s sale, non-primary-dealer investors that place their bids directly with the Treasury, purchased 19.1 percent of the securities, the highest since June 2012, after a record low 0.4 percent at the June sale. The average the past 10 auctions was 16 percent.
Indirect bidders, a category of investors that includes foreign central banks, bought 45 percent of the securities, the lowest since June 2012, after buying 60.8 percent at the June sale and an average of 44.2 percent at the past 10 auctions.
The sale, along with the auctions for $96 billion of debt next week, will raise $41.6 billion of new cash, according to the Treasury.
Inflation-indexed notes pay interest at lower rates than nominal Treasuries on a principal amount that’s linked to the Labor Department’s consumer price index. Consumer prices rose 1.2 percent in September compared with the 12-month-ago period, down from 1.5 percent in August, the Labor Department is forecast to announce Oct. 30, according to the median forecast of 34 economists in a Bloomberg News survey.