What Is It About TIPS 5s Auctions? What Was It About *This* One?

Since we’re still on the topic of Treasury auctions, here’s another one to take a closer look at. Yesterday, Treasury sold $18 billion in 5-year TIPS – the inflation-protected security (91282CCA7) – and though there were plenty of bids they came in at prices somewhat out of whack with the secondary market. This left two-thirds of the offering to be taken down by indirects (foreigners mostly central banks and governments who place bids largely through FRBNY).

Even with $12 billion allocated to them, the auction high was -1.631% with a median -1.69%. Dealers grabbed only $2.3 billion despite $24.8 billion in bids. I guess the prices they offered were way low, somehow seriously unenthusiastic for what you’d think the whole market would be falling all over to snap up.

Since TIPS are auctioned infrequently, at least when compared to its non-protected nominal coupon cousins, these sales can and have at times shuffled the deck when it comes to inflation expectations (and real yields, obviously). What’s unusual perhaps worth taking into account is just how this particular one has done so.

Before going over what I mean about yesterday, first some background. Perhaps the most famous of these auction-dynamic reshuffles had been the TIPS sale in April 2014. While Euro$ #3 (deflationary) had been in the works in eurodollar futures (from September 2013), Chinese yuan, and US Treasury nominal yield curve (both from January 2014), it hadn’t yet smacked into the oil market which dominates the CPI, therefore, the government’s protection payments.

Not only that, early on in 2014, the US economy had apparently shaken off the very cold blast of Polar Vortex which had actually sunk Q1 GDP into a minus. Such shock over such fragility was quickly set aside because Ben Bernanke had, he claimed, handed Janet Yellen the nearest to perfect circumstances each could imagine.

The boom was just around the corner and it was global (just not synchronized, that would have to wait until 2017). In the mainstream version, the big risks for that year and the one beyond were “overheating” following what it would describe as the “best jobs market in decades.” Sustained, accelerating inflation pressures and consumer prices.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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