Interest Rate Roundup

Tuesday, January 23, 2007

TIPS auction pretty good, but ...

Unlike the most recent Treasury Inflation Protected Securities auction, today's sale of 20-year TIPS went over fairly well. The bonds were sold at a yield of 2.42% vs. pre-auction expectations of 2.435%. The bid-to-cover ratio was 2.05% -- down from the last auction's reading of 2.24% but still healthy from a historical standpoint. And indirect bidders (a proxy for foreign central banks) bought 58.9% of the bonds sold, down from 69% last time but not too bad vs. the longer-term average.

Yet bonds are extending earlier losses in the wake of the auction. The long bond was recently down a half-point, in fact. Ten-year yields are challenging strong resistance at 4.8%.

This begs the question: Is a strong TIPS auction really "good" news for bonds? I thought it would be, but apparently not. Maybe traders are saying that strong demand for TIPS shows that bond buyers are afraid of inflation and therefore, willing to pay up for inflation-protected debt.


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