Demand for Safe-Haven Treasuries Fell Due to Investor Sentiment PART 3 OF 6
Overall Demand Rose for the 5-Year TIPS Auction
What are TIPS?
Nominal bond yields rise due to higher inflation expectations. TIPS (Treasury Inflation-Protected Securities) protect the value of debt securities from eroding due to inflation. A TIPS principal is indexed to the consumer price index. The TIPS principal increases with inflation and decreases with disinflation. On maturity, an investor is paid the greater of the adjusted principal or the TIPS original principal amount. Coupon payments on TIPS are applied to the adjusted principal. As a result, the coupon payments on TIPS provide the bondholder with a fixed amount of purchasing power.
This includes mutual funds such as the Vanguard Inflation-Protected Securities Fund – Investor Shares (VIPSX[1]) and the Fidelity Inflation-Protected Bond Fund (FINPX[2]) and ETFs such as the iShares TIPS Bond ETF (TIP[3]) and the PIMCO 1-5 Year U.S. TIPS Index ETF (STPZ[4]).
Key takeaways from the five-year TIPS auction
The US Treasury auctioned five-year TIPS worth $16 billion on April 21. The amount was same as in the December 17 auction. The overall demand for the securities rose by 1.7% from the previous auction with the bid-to-cover ratio of 2.4x on April 21. Read Why TIPS are back in action after inflation warning from large asset managers?[5] to learn more.
The coupon rate came in at 0.13%—the same as the December auction.
Yield analysis
The high yield came in at -0.2% for the April auction. The high yield reported in December's auction was 0.47%—the highest in recent times.
Market demand fell
Market demand fell from 75.0% in December to 67.2% in the April auction. Direct bids rose from 5.0% in August to 8.2% of the total competitive accepted bids in April. Direct bids include bids from domestic money managers such as Invesco (IVZ[6]) and BlackRock (BLK[7]). Indirect bids include bids from foreign governments. They fell from 69.9% in December to 59.1% in April.
Due to lower market demand, primary dealers' uptake rose from 25.1% in December to 32.8% in April. Primary dealers are a group of 22 authorized broker-dealers. They're required to bid at US Treasury auctions. They include firms like Credit Suisse (CS), Morgan Stanley (MS), and Nomura Holdings (NMR[8]).
In the rest of this series, we'll look at the Treasury bills auctions that took place last week.
