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Investors snapped up the $16bn annual new issue of five-year inflation protected Treasuries, despite the move lower in recent weeks in inflation expectations and yields.
TIPs are often considered to be inflation protected in a rising-rate environment, assuming that the driver of rising rates is inflation increasing, meaning the products offer some protection as yields rise and prices fall.
But strong demand from investors came as US breakeven rates, a market measure of inflation expectations calculated from the difference between Treasury yields and TIPs yields, have been falling.
The buying activity suggests investors think interest rates can continue to decline but breakevens are likely to stabilise, said Aaron Kohli, an analyst at BMO Capital Markets. In that scenario, TIPs yields also end up falling, meaning their price rises.
“If you expect Treasury yields overall to go down and breakevens to stay where they are, then you want to buy at this level,” said Mr Kohli.
Boris Rjavinski, a strategist at Wells Fargo Securities, notes that breakevens are currently below consumer inflation numbers. “In other words, fundamentally there was a good value in five-year TIPS,” he said.
The current five-year TIPs yield is minus 0.035 per cent, with the auction selling at minus 0.049 per cent. There are three five-year TIPs auctions a year, with the other two “re-opening” Thursday’s issue.