The extension of the Federal Reserve’s Operation Twist program is keeping prices of inflation-indexed U.S. debt lower than they would otherwise be, according to Michael Pond of Barclays Plc.
Yields on Treasury Inflation Protected Securities maturing in 20 years to 30 years would be as much as 15 basis points, or 0.15 percentage point, lower if the Fed continued to buy the securities at a percentage equal to the amount traded as it did under the second round of its quantitative-easing program, he said. TIPS will account for about 3 percent of the Fed’s purchases announced last week, compared with 6 percent during so-called QE2.
Central-bank officials led by Chairman Ben S. Bernanke last week increased and extended the program, which is replacing $400 billion of shorter maturities with longer-term debt through the this month, until year-end. They increased it by $267 billion.
“The Fed purchased a boatload of nominal versus TIPS and looks to do so again, and as such break-evens have been pressured to the downside as investors flocked to longer dated Treasuries - an unintended consequence of the Fed’ action,” said Pond, the top rated TIPS analyst the past three years in Institutional Investor magazine polls of more than 890 firms that manage about $10.2 trillion in assets. “They will likely stay relatively cheaper than they would be until Twist is over or the Fed changes their purchase amounts.”
The Fed’s purchases of longer maturity Treasuries have almost quadrupled to $112 billion from QE2, he said. That compares to a 7.1 percent growth in longer TIP purchases to $7.5 billion over the same time frame, he said.
The yield gap between 10-year notes and TIPS, a signal of traders’ expectations for inflation called the break-even rate, was 2.07 percentage points. It touched a 2012 low of 1.9 percentage points on Jan. 3 and a high of 2.45 percentage points on March 20.
“We do not think the Fed is trying to actively distort break-evens,” Pond said. “We encourage the Fed to increase its allocation to TIPS purchases in its extension of Twist”
Barclays Capital is one of 21 primary dealers that are obligated to bid in Treasury auctions.
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