Yields on five-year Treasury Inflation Protected Securities turned negative after the Federal Reserve said inflation is running below levels that reflect a healthy economy.
TIPS pay interest on a principal amount that rises with consumer prices. As yields on conventional shorter maturities have plunged, investors have been willing to buy TIPS with negative yields betting that return from the inflation adjustment will exceed the interest the fixed-rate notes pay.
The Federal Open Market Committee said in its statement yesterday that âmeasures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandateâ to promote employment and price stability.
âThe big story is the Fed telling us they wouldnât mind it if inflation went up a bit,â said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo & Co. in Milwaukee. âTheyâre probably going to have to engage in some more quantitative easing.â
The five-year inflation-protected note yield dropped 3 basis points, or 0.03 percentage point, to negative 0.07 percent at 3:12 p.m. in New York, according to BGCantor Market Data. The price of the 0.5 percent security maturing in April 2015 gained 1/8, or $1.25 per $1,000 face amount, to 102 19/32.
The TIPS yield last turned negative on Aug. 6, four days before the central bankâs policy meeting after which it said the Fed would reinvest principal payments on its mortgage holdings into long-term U.S. debt securities to stimulate an economic recovery that has proved âmore modestâ than anticipated.
Yields on inflation-indexed Treasuries maturing in July 2012 have been negative since July 20 as yields on conventional two-year Treasuries dropped to record lows well below the annual rate of inflation.
The yield on the two-year note touched an all-time low for a second day after the Fed said yesterday itâs prepared ease policy further to support the economic recovery. The central bank bought $2.07 billion of Treasuries maturing from March 2013 to April 2014 today as part of its effort to keep borrowing costs low.
âThere is an underlying bid in the market as the bull trend in Treasuries remains intact,â said Martin Mitchell, head government bond trader in Baltimore at Stifel Nicolaus & Co., a brokerage firm. âThe Fed has tipped their hand that they are likely to initiate a larger-scale asset-purchase program in the future. If the Fed becomes a larger buyer, the Treasury market can only go higher.â
The Fed said in its statement yesterday that itâs prepared âto provide additional accommodation if needed to support economic recovery and to return inflation, over time, to levels consistent with its mandate.â
Consumer prices excluding food and energy increased in August for a fifth month at an annual rate of 0.9 percent, matching the slowest year-over-year rate of gains since 1966, the Labor Department said Sept. 17.
The Fed completed a program to buy $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt in March. The Fed was the biggest buyer of Treasuries when it purchased $300 billion of U.S. debt in 2009.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the maturity known as the break-even rate, was 1.88 percentage points, compared with the five-year average of 2.11.
They just can't get themselves to utter the word, "deflation" nor can they do anything about it. :eek: