Tags: Investors | sale | Inflation-Protected | Treasurys

Investors Cool to Sale of Inflation-Protected Treasurys

Thursday, 20 March 2014 03:28 PM

Thursday's sale of $13 billion of 10-year Treasury Inflation Protected Securities attracted below-average demand a day after Federal Reserve Chair Janet Yellen signaled inflation isn’t a “significant concern.”

Investors bid for 2.48 times the amount of notes available at the sale, below the average of 2.52 at the previous 10 auctions. Primary dealers picked up 45.4 percent of the notes, the most since September 2012. The securities yielded 0.659 percent, exceeding the 0.652 percent average forecast of six of the Fed’s 22 primary dealers in a Bloomberg News survey before the auction.

“It’s a negative environment for inflation right now,” said Aaron Kohli, an interest-rate strategist at primary dealer in New York BNP Paribas SA, which as a primary dealer is obligated to participate in Treasury sales. “Investors are not worried about inflation anytime soon. Any risk premium that had been built in is just going away. If the Fed is on a path to taper when inflation is low, it makes no sense to build in a risk premium.”

The yield on the current 10-year inflation-indexed note rose two basis points, or 0.02 percentage point, to 0.63 percent as 2:54 p.m. New York time, according to Bloomberg Bond Trader prices. The yield climbed 13 basis points Wednesday, the most since Nov. 8. The price of the 0.625 percent security due January 2024 fell 7/32, or $2.19 per $1,000 face amount, to 99 30/32,

The benchmark 10-year note yield was little changed at 2.78 percent. It rose 10 basis points Wednesday, the most since June 2011.


The difference between the yields on 10-year notes and similar maturity TIPS, a gauge of the outlook for consumer prices over the life of the debt known as the break-even rate narrowed to 2.13 percentage points, matching the least since Feb. 7.

Inflation measured on a 12-month basis has been below the Fed’s 2 percent goal for almost two years, and prices rose just 1.2 percent for the year ending January.

The Federal Open Market Committee said Wednesday it will no longer link borrowing costs to a specific unemployment rate, saying it would instead consider a broad range of indicators on the labor market, inflation and financial markets.

The FOMC held the benchmark interest rate, the target for overnight loans between banks, at zero to 0.25 percent, where it has been since December 2008.

‘Full Employment’

“We know we’re not close to full employment, not close to an employment level consistent with our mandate, and unless inflation were a significant concern, we wouldn’t dream of raising the federal funds rate-target,” Yellen said at the press conference in Washington.

Indirect bidders, a category of investors that includes foreign central banks, bought 46.6 percent of the securities at Thursday’s sale, compared with an average of 50.8 percent at the past 10 offerings.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 7.9 percent of the securities, versus a 10.2 percent average at the past 10 sales.

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.

TIPS have returned 1.9 percent this year after losing 9.4 percent in 2013. It was their second annual loss since being introduced in 1997 and their worst year ever, according to Bank of America Merrill Lynch’s U.S. Inflation-Linked Treasury Index. The first loss was a 1.1 percent decline in 2008. The broader Treasury market has gained 1.3 percent this year, compared with a 3.4 percent drop in 2013, the indexes show.

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Thursday's sale of $13 billion of 10-year Treasury Inflation Protected Securities attracted below-average demand a day after Federal Reserve Chair Janet Yellen signaled inflation isn't a "significant concern."
Thursday, 20 March 2014 03:28 PM
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