The Treasury sold $15 billion in 10-year inflation-indexed notes at a record negative yield as investors sought a hedge against rising consumer prices amid speculation the Federal Reserve will added more stimulus.
The Treasury Inflation Protected Securities, or TIPS, were sold at a so-called high yield of negative 0.637 percent, the fourth consecutive auction of the securities were investors were willing to pay the U.S. to hold their principal. Five-year TIPS have also been sold at negative yields at the past five auctions of the securities.
Federal Chairman Ben Bernanke said in testimony before the House of Representatives Wednesday that economic activity decelerated during the first half of the year, adding that policy makers are prepared to take further action as needed. The central bank bought $2.3 trillion in debt in two rounds of so- called quantitative easing, beginning in November 2008, to avert a prolonged decline in prices, or deflation, and to boost the economy from the recession that ended in June 2009.
“The Federal Reserve is basically telling us they’re not too worried about inflation right now, they’re worried about stimulating the economy in order to bring down the unemployment rate,” said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh, before the auction. “There is continued investor demand for TIPS.”
The securities pay interest at lower rates than regular Treasurys on a principal amount that’s adjusted based on the Labor Department’s consumer price index.
The cost of living in the U.S. was unchanged in June, as energy prices declined. The consumer-price index climbed 1.7 percent for the 12 months ended June, matching the slowest pace since January 2011, down from 3.9 percent for the 12 months ended September 2011, the Labor Department said July 17. The so-called core measure, which excludes food and energy costs, climbed 0.2 percent.
The bid-to-cover ratio for the notes, which gauges demand by comparing the amount bid with the amount offered, was 2.62, compared with an average of 2.75 at the past 10 auction of the securities.
Indirect bidders, a category of investors that includes foreign central banks, bought 44.2 percent of the securities at the sale today, compared to an average of 40.7 percent at the past 10 auctions.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 16.1 percent of the securities, versus an 12.6 percent average at the past 10 auctions.
U.S. inflation-linked debt maturing in 10 or more years has returned 10.2 percent this year, compared with a 5.9 percent gain in the broader TIPS market and a 2.7 percent gain in the overall Treasury market, Bank of America Merrill Lynch indexes show.
The difference between yields on U.S. 10-year notes and comparable TIPS, a gauge of expectations for inflation during the life of the debt known as the break-even rate, was 2.11 percentage points. The average during the past decade is 2.15 percentage points.
“Our expectation has been that the Fed’s going to do another QE program, it’s a matter of when,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers required to bid at government debt auctions. “You have the market thinking you’re going to have 2 percent headline inflation over the next decade. That’s not exactly high.”
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