TIPS now sold for a NEGATIVE yield.

[cpwill]

deflation hawks, eat your heart out.

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 percent, 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.”

 

[washunut]

deflation hawks, eat your heart out.

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 percent, 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.”

Could it be a simple case of supply and demand. The issue was $10 billion and a lot of people are looking for an inflation hedge down the road.

 

[drz-400]

Looks like QE2 is already working w/out being implemented yet. The market is in effect pricing in QE2 before it happens. Also, historically time periods with rapidly rising commodity prices have been associated with negative real interest rates.

 

[washunut]

Looks like QE2 is already working w/out being implemented yet. The market is in effect pricing in QE2 before it happens. Also, historically time periods with rapidly rising commodity prices have been associated with negative real interest rates.

I can't remember a time of rising commodity prices with the CPI showing little inflation. Please point to a period you think fits that description.

 

[drz-400]

I can't remember a time of rising commodity prices with the CPI showing little inflation. Please point to a period you think fits that description.

On the top is a graph of the 6 month treasury nominal rate minus the annual cpi inflation rate. This is in effect the real interest rate on the 6 month treasury bills. As you can see, there have been significant negative real interest rates in the 70's.

On the bottom is a graph of the PPI, or the producer price index for all commodities. As you can see, historically rapidly rising commodity prices is somwhat correlated with negative real interest rates.