The U.S. sold $13 billion of 10-year inflation-linked debt at the lowest demand since the financial crisis after the Federal Reserve indicated inflation is running below target as it winds down its stimulus program.

The Treasury Inflation Protected Securities bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.20 Thursday, the lowest since July 2008, and compared with 2.49 at the July auction and a 10-sale average of 2.56. The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of inflation expectations, fell to the lowest in a year after the auction.

“The likelihood of higher short-term real interest rates typically hit TIPS much faster than conventional Treasurys,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “If the Fed is not going to wait till it sees the whites in the eyes of inflation before it moves, there’s a far lower chance inflation gets out of control while the Fed waits for the economy to normalize.”

The securities drew a yield of 0.610 percent, the most since March’s auction. The U.S. sold $15 billion in 10-year TIPS at the last auction of the securities, on July 24, drawing a yield of 0.249 percent, the lowest in more than a year.

Inflation Outlook

Indirect bidders, a category of investors that includes foreign central banks, purchased 52.7 percent of the securities, compared with 53.1 percent at the last sale and an average of 53.7 percent at the past 10 offerings.

Direct bidders, an investor category that includes pension funds and insurers, bought 5.7 percent of the notes, the least since September 2013, compared with 10.3 percent at the July sale and 9.2 percent for the average at the past 10 auctions.

“Inflation has been running below the committee’s 2 percent objective,” Fed Chair Janet Yellen said Sept. 17 after a policy makers meeting. In July, the Fed said inflation was “somewhat closer” to its goal. The Fed is on course to end its quantitative-easing program in October, after tapering monthly bond buying to $15 billion in its seventh consecutive $10 billion cut.

The U.S. 10-year break-even rate, the gap between yields on 10-year notes and comparable TIPS that signals trader expectations for inflation over the life of the debt, was 2.03 percentage points, the lowest since July 2013, based on closing-price data. The average over the past five years is 2.2 percentage points.

‘Silver Lining’

“It’s hard to find the silver lining in the dark cloud for inflation,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 22 primary dealers obligated to bid at U.S. debt auctions. “It’s not a very healthy looking market.” Kohli recommends 30-year inflation-indexed securities. They keep “you out of the turbulence happening with the five- year,” he said.

TIPS of all maturities lost investors 2.7 percent in September, cutting their returns this year to 4.2 percent, according to Bank of America Merrill Lynch indexes. The securities lost investors 9.4 percent last year, according to the index.

Conventional Treasurys have lost investors 1.2 percent this month, slicing returns to 3.1 percent this year after falling 3.4 percent in 2013, the indexes show.

Inflation-indexed notes pay interest at lower rates than nominal Treasurys on a principal amount that’s linked to the Labor Department’s consumer price index.

The CPI declined 0.2 percent in August, the first decrease since April 2013, a Labor Department report showed Wednesday. Overall consumer prices climbed 1.7 percent in the 12 months ended in August, following a 2 percent year-over-year gain the prior month.