First Positive Yields in Four Years Bolster Five-Year TIPS Sale

The first positive yields at a Treasury auction of five-year inflation-indexed notes since 2010 helped lift demand from a class of investors that includes foreign central banks to the highest on record.

The $16 billion of Treasury Inflation Protected Securities were sold at a yield of 0.395 percent, the first of 13 sales of the maturity where bidders weren’t willing to accept negative returns in exchange for a hedge against higher consumer prices. Indirect bidders bought 64.8 percent of the securities, the most in records dating to October 2004.

“There was strong customer demand, likely showing bargain-hunting by the investor base,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “It seems to be less about inflationary fear and more about asset managers who have money to put to work in the sector taking advantage of the first positive yield on the five-year since April 2010.”

The sale was rated a ‘4’ by four of the Federal Reserve’s 22 primary dealers on a scale of one to five, with one denoting a failed auction and five judging the results as outstanding.

Indirect bidders purchased 56.3 percent at the last offering of the maturity, in August, and an average 45.9 percent at the past 10 auctions.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 5.2 percent of the securities, the most since April, compared with 3.5 percent at the last sale. The average at the past 10 was 10.1 percent.

Dealers’ Share

Primary dealers, who are obligated to bid in U.S. debt auctions, were left with 30 percent of the securities, the least in records going back to October 2004. The average at the past 10 sales was 44 percent.

The auction’s bid-to-cover ratio, a gauge of demand that compares the amount bid with the amount offered, was 2.37, the lowest since August 2013. The ratio at the last sale was 2.48, and the average at the past 10 was 2.60.

A Bloomberg News survey of six primary dealers had forecast a yield of 0.385 percent. The last auction of the debt yielded negative 0.281 percent.

Holders of TIPS 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. The difference is known as the break-even rate.

The gap between yields on 5-year notes and same-maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt known as the break-even rate, traded at 1.16 percentage points. It reaching 1.21 percentage points, the widest since Dec. 12, before the auction.

Conventional Treasury five-year note yields rose five basis points, or 0.05 percentage points, to 1.66 percent in New York trading, according to Bloomberg Bond Trader data.

Treasuries fell after Fed Chair Janet Yellen suggested following a policy meeting Dec. 17 that a “patient” approach to interest rates may translate into an increase by mid-2015.

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