Treasury 30-Year Inflation Debt Auction Foreign Demand a RecordDaniel Kruger
The Treasury’s sale of 30-year inflation-protected bonds received the highest demand on record from a group of investors that includes foreign central banks, a day after a report showed an unexpected rise in consumer prices.
Indirect bidders bought 64.5 percent of the $7 billion in Treasury Inflation Protected Securities yesterday, compared with the average of 46.7 percent at the past 10 auctions. The Treasury began releasing the bidder participation data when it resumed selling 30-year TIPS in 2010, after a nine-year hiatus. The debt was first offered in 1998.
The securities yielded 0.985 percent, versus the average 0.975 percent average forecast of seven of the Federal Reserve’s 22 primary dealers in a Bloomberg News survey. The difference between yields on 30-year TIPS and comparable maturity Treasuries known as the break-even rate narrowed to 1.99 percentage points this month, the least since October 2011, from 2.46 percentage points in January, indicating declining expectations for consumer prices over the life of the bonds.
“If you’re going to be an opportunistic buyer, this is a good entry point,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of the primary dealers that are obligated to bid at U.S. debt auctions. “Dealers were reticent to warehouse a lot of it, while the buy side is looking at this as a good opportunity.”
Primary dealers bought 31 percent of the offering, compared with an average of 37.9 percent of the previous 10 sales.
The transaction was rated a “four” by seven primary dealers, based on a scale of one through five, with one being a failed auction and five judging the results as outstanding. Two would denote a poor auction, three an average sale and four indicates a good offering, according to a survey immediately after the auction.
The auction’s tail, or the amount of yield in excess of where the security was trading before the sale, was about 1.5 basis points, according to Princeton, New Jersey-based Stone & McCarthy Research Associates.
“This is cheap inflation protection,” said Jonathan Lewis, a money manager at New York-based Samson Capital Advisors LLC, which has $7.4 billion in assets. Lewis has been increasing his holdings in TIPS.
Faster inflation benefits TIPS buyers, who receive an adjustment to the principal value of their securities equal to the change in the consumer price index, in addition to a fixed rate of interest that’s smaller than the interest paid to a holder of conventional debt.
After the U.S. annual inflation rate rose to a two-year high of 2.1 percent in May, consumer-price increases slowed for three straight months. The Labor Department yesterday said the consumer-price index rose 1.7 percent in the 12 months ended in September, the same as in the year ended August, versus forecasts in a Bloomberg survey for 1.6 percent.
Higher-than-forecast consumer prices “eases concerns about near-term disinflationary pressures,” said Michael Pond, head of global inflation-linked research at Barclays Plc, a primary dealer. “Clearly it had to be cheap to go well, but it was cheap and therefore it went well.”
The Fed’s preferred measure of inflation, a gauge of personal consumption expenditures, has held below the central bank’s 2 percent target for 28 consecutive months.
The sale drew a bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, of 2.29, the lowest since 2001, before the Treasury temporarily suspended offerings of the maturity, versus an average of 2.68 at the past 10 offerings.
While the ratio of bids to debt sold was in line with last month’s $13 billion sale of 10-year TIPS, which produced a 2.20 bid-to-cover ratio, the lowest since 2008, dealers bought a much smaller share of this month’s auction.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 4.5 percent, versus a 15.4 percent average at the past 10 offerings.
TIPS due in 15 years and longer have returned 17 percent this year after losing 19 percent in 2013, their worst year on record, according to Bank of America Merrill Lynch’s 15-Plus Year U.S. Inflation-Linked Treasury Index. Treasuries maturing in 15 years or longer have gained 20 percent this year, compared with a 13 percent drop in 2013, according to the Merrill Lynch 15-Plus U.S. Treasury Index.