Belmont Club


Bloomberg reports that “the Treasury sold $10 billion of five-year Treasury Inflation Protected Securities at a negative yield”. Yes, you heard that right. The New York Times writes:

Bizarre as it sounds, that is correct. In an auction of a special kind of five-year Treasury bond, investors paid $105.50 for every $100 of bonds the government sold — agreeing to pay the government for the privilege of lending it money.

But these aren’t just any bond, they’re bonds insured against inflation. The securities, called TIPS or Treasury Inflation Protected Securities, “are indexed to inflation in order to protect investors from the negative effects” The NYT explains:

The reason is that these types of bonds offer a guaranteed protection against inflation. So, if inflation soars — as some economists worry might happen, with the government seeking to give the economy a boost by flooding it with money — the value of the bonds would go up accordingly. …

The unusual auction on Monday “reflects a condition in the Treasury market that has been in place for months, chiefly that yields on shorter maturities have moved below the inflation rate,” Anthony Crescenzi, a senior vice president at the bond giant Pimco, wrote in a research note.

Buying such a bond would recover in retained value what the borrower/lender lost by paying the negative interest. In other words, if the magic coating preserves more value than the coating costs then its a deal. This is a financialese for saying that investors are worried that inflation may ‘unexpectedly’ rise. In fact the bond buyers are hoping that it will.

“It was good demand considering the negative yields,” he said. “They are counting on the Fed to be successful in generating inflation.” … Inflation-protected Treasury securities have already been trading at negative yields on the open market for some time, as professional and institutional investors have sought to hedge their portfolios against the risk of inflation. But Monday was the first time since the government began selling these so-called Treasury Inflation-Protected Securities in the 1990s that new ones were sold at a negative yield.

“The U.S. can only sell TIPS at a negative yield, according to McKayla Barden, a spokeswoman at the Bureau of the Public Debt. It’s not government policy to auction conventional debt at that level,” she said.” So why is anybody paying any attention to these sales? Because it’s seen as a leading indicator that inflation may soon be on the upsurge. The news isn’t the sale, but in what the sale signals.

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