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Treasurys sells inflation-insured bonds below zero

Treasurys sells inflation-insured bonds below zero

October 26th, 2010 in News

NEW YORK (AP) - The Treasury sold inflation-protected bonds at a negative yield for the first time on Monday, a sign that bond buyers expect inflation to gain strength.

The government auctioned $10 billion in five-year Treasury Inflation Protected Securities at a negative 0.55 percent yield. But that doesn't mean their new owners have to cut the government a check every six months in return, said Thomas Simons, money market economist at Jefferies. Think of the negative yield as a mathematical curio, he said.

Monday's sale was a re-opening of five-year bonds first auctioned April 26 that pay a 0.50 percent coupon. The latest auction simply added $10 billion to that $11 billion issue, without changing the underlying interest rate.

Treasury yields are near record lows, but yields on five-year TIPS turned negative last month and have stayed below zero. TIPS don't act like other bonds. Their principal and payments rise with inflation as measured by the Consumer Price Index. So the surge in demand for TIPS shows many investors are betting inflation will rise and give TIPS a lift.

Judging by bond yields, the market expects inflation to average 1.73 percent over the next five years. That's higher than the Consumer Price Index's current 1.1 percent increase over the past year.

Treasury bonds were mixed on Monday after receiving a boost from foreign banks lured by a falling dollar. The 30-year bond rose 31.2 cents to $99.25, lowering the yield to 3.91 percent from 3.93 percent late Friday. The 10-year Treasury note lost 6.25 cents on the dollar to $100.50, with the yield unchanged at 2.56 percent. The yield on the two-year note also stayed at 0.36 percent. Bond prices and yields move in opposite directions.

Traders expect Treasury prices to move lower ahead of this week's other auctions. The government plans on selling another $99 billion in new bonds.

In the Treasury bill market, the three-month T-bill paid a 0.12 percent yield at a discount of 0.13 percent.