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U.S. Treasury prices fell on Thursday after the government had to pay more to sell $7 billion in new 30-year Treasuries Inflation Protected Securities (TIPS).Prices also dropped as investors reworked positions, a day after the Federal Reserve struck a more dovish tone than expected at its June meeting. The TIPS were sold at a high yield of 1.116 percent around 3 basis points higher than where the debt traded before the sale.
“It was much weaker than we thought,” said Rick Klingman, a Treasuries trader at Societe Generale in New York. The weakness came after bonds rallied on Thursday morning as investors covered bearish Treasury positions made on expectations that the Fed would take a more hawkish tone on Wednesday. Stronger than expected consumer price data on Tuesday had led some investors to expect the Fed would hint towards interest rate hikes sooner than had been previously expected.
A gauge of U.S. inflation expectations for the next five years touched the highest level in more than a year after Yellen said on June 18 that the Fed maintains its commitment to low interest rates and dismissed a faster than forecast rise in the U.S. consumer price index.
“The market is struggling, will they overshoot in terms of easy money and what are the implications for longer-term inflation?” Margaret Kerins, the Chicago-based head of fixed-income strategy at Bank of Montreal, one of 22 primary dealer that trade with the central bank. “There’s uncertainty there that justifies a risk premium.”
Long-term inflation expectations rose to the highest level in five months on Friday, though they remain contained.
The 10-year break-even rate or the yield spread between a 10-year Treasury inflation protected security and the benchmark 10-year Treasury note, widened by 0.02 percentage point to 2.26 percentage points Friday. That means investors expect the U.S. inflation rate to be 2.26% on an annualized basis on average in a decade. It has risen from 2.11% two months ago. This year’s peak of 2.32% was set in January.
The 10-year Treasury yield has dropped from 3% at the start of the year, its price boosted by the uneven pace of global economic growth, geopolitical risk in some developing countries and record-low interest-rate policies from major central banks.
U.S. bonds offer superior yields compared with their counterparts in Germany and Japan, enticing investors seeking relative value.
The primary dealers held $39.8 billion of Treasury notes and bonds as of June 11, up from $6.2 billion on May 23 and the most since Nov. 29, according to central bank data.