U.S. Zero-Coupon Debt Highest Since 1999 With Inflation Absent

The outstanding amount of zero-coupon U.S. Treasury notes and bonds rose to the highest level since December 1999 amid demand from pension funds and insurance companies matching assets with liabilities.

Zero-coupon debt, or strips, short for separate trading of registered interest and principal securities, is created by Wall Street firms that split bonds into their face amount and individual coupon payments. The amount of strips rose by $1.36 billion, or 0.66 percent, to $209.26 billion in May, Treasury Department data released today show.

Thirty-year strips returned 22 percent this year, compared with a gain of 11.2 percent for the Treasury bond due in May 2044, according to Bank of America Merrill Lynch index data. The yield on strips maturing May 2044 was at 3.63 percent.

“‘Investors like pension funds and insurance companies are starved for long-duration fixed income assets,’’ said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of 22 primary dealers that trade with the Federal Reserve. ‘‘What you’ve seen is a general demand for duration in the market.’’

The securities are considered the most vulnerable to inflation, which has persisted below the Fed’s 2 percent target rate.

The Fed’s preferred inflation gauge has undeperformed the target for a 24th straight month, even as it increased. The personal consumption expenditures deflator rose 1.6 percent in April from a year earlier, the biggest jump since November 2012, according to data released May 30.

Inflation remains low even as the economy is expected to expand. Gross domestic product is forecast to grow 3.5 percent in the second quarter, after contracting 1 percent in the first three months of the year, according to a Bloomberg survey of economists.

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