Fed Pullback Fuels Treasury Inflation Protected Debt Demand

The U.S. Treasury Department can thank the Federal Reserve for the surge in demand at Thursday’s auction of inflation-protected bonds.

The $13 billion in 10-year Treasury Inflation-Protected Securities, or TIPS, were sold at a yield of 0.2 percent, the lowest at an auction of the debt since May 2013. The Fed indicated Wednesday it isn’t in a rush to raise interest rates, leaving the door open for economic growth to stoke inflation.

“The Fed backing away from its harsh stance frees inflation expectations to rise a little bit more,” said Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee.

Ten-year break-evens, the difference between yields on 10-year Treasury inflation protected securities and nominal equivalents, show investors expect U.S. consumer prices to rise 1.79 percent a year for the coming decade, up from a 2015 low of 1.49 percent on Jan. 14.

The gauge rose as much as 0.09 percentage point Thursday as rising prices for TIPS pulled their yields down and further away from yields on benchmark 10-year notes.

Indirect Bidders

The auction of TIPs drew record demand of 75.7 percent from a category of investors that includes foreign central banks. Investors were drawn to U.S. securities amid inflation expectations that are second highest among its Group of Seven peers.

“The dovish message from the Fed really opened up demand,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., one of 22 primary dealers that trade Treasuries with the Fed. “Longer-dated break-evens should have limited downside from here.”

Fed Chair Janet Yellen reiterated her view on Wednesday that the impact from lower oil prices on inflation will be transitory. Crude oil futures fell 3.5 percent to $43.08 a barrel in New York, close to a six-year low.

“The market is priced for the Fed to undershoot its 2 percent target,” said Michael Pond, head of global inflation-linked research at primary dealer Barclays plc. The auction “was clearly a sign of good long-term buyer demand.”

Treasury Inflation Protected Securities, or TIPS, pay interest at lower rates than regular Treasuries on a principal amount that’s linked to the Labor Department’s consumer price index.

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