The Treasury sold $9 billion of 30-year TIPS Feb. 21. Indirect bidders, a gauge of demand from overseas buyers, bought 54.5 percent of the issue, the second-biggest share on record going back to 2001, according to data compiled by Bloomberg.
Under Pressure
With economies still failing to shrink debt and grapple with above-average unemployment, growth and inflation are likely to stay subdued, according to Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, one of 21 primary dealers that trade with the Fed. The U.S. economy contracted in the fourth quarter while Japan and the 17-nation euro area extended recessions.
“Break-even rates may come under pressure again if risk appetite falters,” Anton Heese, the global head of inflation strategy at Morgan Stanley in London said by phone on Feb. 13. “My impression is that a lot of investors lack conviction on the recovery we are seeing at present. The output gap in the economy is still substantial. Therefore, there is potential for growth to pick up with inflation remaining subdued.”
Target Rate
The Fed cut its benchmark overnight bank lending rate from 5.25 percent in September 2007 to a record low of zero to 0.25 percent in December 2008. It began buying $1.7 trillion in mortgages, Treasuries and agency debt to encourage new bank lending in 2008, followed by a $600 billion second round of Treasury purchases in November 2010. Operation Twist in September 2011 replaced $667 billion in short-term bonds with longer-maturity issues.
The central bank is now buying $85 billion of mortgages and Treasuries each month to underpin the economy and reduce the 7.9 percent unemployment rate. Its balance sheet topped $3 trillion for the first time last month.
Policy makers said in December they would hold interest rates at about zero so long as projected inflation stays at 2.5 percent or less and unemployment remains above 6.5 percent. The jobless rate was 7.9 percent in January, government data show.
Investors should buy TIPS because the Fed’s policies will eventually fuel inflation, according to Bill Gross, co-chief investment officer at Pimco, which runs the world’s biggest bond fund. “We’re not inflationary hawks in 2013. We simply think because central banks are writing trillions of dollars worth of checks, ultimately that will produce the desired inflation they are targeting,” he said in a telephone interview Feb. 22.
International Linkers