Tuesday’s sale of 10-year Treasury inflation-protected securities was weak, a sign that traders believe inflation will continue to decelerate.
On Tuesday, investors were offered $15 billion in 10-year Treasury inflation-protected securities, or TIPS, which are U.S. government debt securities whose principal, or face value, goes up and down with the pace of inflation. The auction was awarded a 2.18% yield at the upper end, the highest yield offered at an auction on 10-year TIPS since Jan. 6, 2009.
Primary dealers, who are set up to buy the supply not taken up by bidders, had to accept 13.6% of the debt on offer, notably higher than the average of 7.3%.
Buyers likely shunned the 10-year TIPS because data have shown that the pace of inflation continues to slow. Consumer prices climbed by 3.2% in October versus a year ago, compared with a rate of 3.7% in September and August.
The pace of inflation has markedly come down since its peak mid-last year, and recent readings have added to the market’s confidence that the Federal Reserve will be able to contain prices over the longer term. While that is positive for the overall U.S. economy, it doesn’t bode well for a TIPS security. Rather, it diminishes the inherent value of inflation protection at this stage in the cycle, writes Ben Jeffery, a strategist at BMO Capital Markets.
After the auction, all three major stock market indexes fell slightly further. The S&P 500 fell 0.3%, compared with 0.12% before. The tech-heavy Nasdaq Composite was down 0.7% while the Dow Jones Industrial Average fell 0.2%.
Recent weak auctions of government bonds have led stock indexes lower and bond yields higher. The indexes moved up when the 20-year standard Treasury auction on Monday saw a strong uptake.
Write to Karishma Vanjani at karishma.vanjani@dowjones.com
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