(Bloomberg) -- An auction of inflation-protected US Treasuries on Thursday drew the highest yield in more than a decade.
The $20 billion sale of 10-year Treasury Inflation-Protected Securities, or TIPS, was awarded at 2.243%, the highest result since January 2009 and about a basis point higher than the indicated yield at 1 p.m. New York time, the bidding deadline. While Treasury yields of all types have been gradually rising and linger shy of their 2023 peak levels, auctions capture yields only once per month.
The rise in inflation-protected yields reflects “a combination of underlying growth fundamentals and the market pricing in longer-term real term premium as a result of concerns about the fiscal outlook,” said Michael Pond, head of global inflation-linked market strategy at Barclays Capital Inc. “The economy has held up well despite higher rates.” The Federal Reserve’s ongoing reduction in its holdings of Treasuries is also a factor, he said.
Despite drawing a higher-than-anticipated yield, the auction fared better than appeared likely earlier in the day, when weakness in the broader Treasury market briefly lifted the indicated yield to around 2.26%, exceeding auction results since 2008.
And it was better than the most recent TIPS auction — a five-year reopening on Dec. 19 that drew a yield about seven basis points higher than the indicated yield, a historically poor result.
Market reaction to Thursday’s auction results was minimal, with yields for longer-maturity remaining higher by two to four basis points.
Current conditions driving TIPS yields are completely different from those that existed during the throes of the financial crisis that began in 2008. While demand for inflation protection collapsed — a negative for TIPS — so did growth expectations, which have a high correlation with TIPS yields.
“Real yields in that period should not have gone up,” Pond said. They did because the financial crisis caused liquidity problems in the TIPS market.
When regular Treasury yields reached their October 2023 peaks, the levels were the highest ones since 2006 or 2007, before the financial crisis. Nominal yields declined during the crisis while TIPS yields rose. On Thursday, Treasury yields were slightly higher across most maturities.
TIPS also underperformed nominal Treasuries during the flight-to-cash at the onset of the Covid pandemic in 2020 — but to a lesser degree. By that point, the TIPS market was about three times as large as in 2008 with more long-term investors, Pond said. The Federal Reserve was also quicker to stabilize the market via asset purchases.
(Adds auction results and market reaction.)
