(Bloomberg News) The Treasury sold $10 billion of five-year Treasury Inflation Protected Securities at a negative yield for the first time at a U.S. debt auction as investors bet the Federal Reserve will be successful in sparking inflation.

The securities drew a yield of negative 0.55%, the same as the average forecast in a Bloomberg News survey of 7 of the Fed's 18 primary dealers. The sale was a reopening of an $11 billion offering in April. Conventional Treasury notes erased gains amid speculation on the amount of debt the Fed may buy to spur the economy in a tactic called quantitative easing.

"It signals people's expectation of the Fed being able to create some inflation with the QE program," said Alex Li, an interest-rate strategist in New York at Deutsche Bank AG, which as a primary dealer is required to bid at Treasury auctions. "With nominal rates so low, in order have high TIPS breakevens you've got to have negative real yields on the five-year."

Holders of TIPS receive an adjustment to the principal value of their securities equal to the change in the consumer price index, in addition to a fixed rate of interest that's smaller than the interest paid to a holder of conventional debt. The difference between is known as the breakeven rate.

The fixed payment on five-year TIPS, known as the real yield, has been pushed below zero because the rise in the CPI is greater than the yield on regular five-year U.S. notes, which has fallen with other Treasury yields as investors sought the safety of U.S. government debt. A negative yield suggests investors are betting Fed Chairman Ben S. Bernanke will be successful in preventing deflation and the risk of the economy slipping back into recession.

'Good For The Economy'

The U.S. can only sell TIPS at a negative yield, according to McKayla Barden, a spokeswoman at the Bureau of the Public Debt. It's not government policy to auction conventional debt at that level, she said.

The negative yield is "a reflection of where the overall rate environment is, combined with the expectation for the Fed to stoke inflation and get prices rising again, which will ultimately be good for the economy," said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Conn.. "It does demonstrate faith in the Fed and the Fed's ability to spur inflation, which is their desire."

Inflation in 2010 will be 1.6%, according to the median estimate of 59 forecasters in a Bloomberg News survey.

Thirty-year bond yields declined two basis points to 3.91% at 4:57 p.m. in New York yesterday, after earlier dropping as much as seven basis points to 3.86%, according to BGCantor Market Data. Ten-year note yields rose one basis point to 2.56%, after earlier falling to 2.49 percent.

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