Treasury Auction Sees First Negative Yield Ever (IEI)

The Treasury sold $10 billion of five-year Treasury Inflation Protected Securities (TIPS) at a negative yield for the first time at a U.S. debt auction as investors bet the Federal Reserve will be successful in halting deflation. The iShares Lehman 3-7 Yr Treasury Bond ETF IEI, which seeks investment results that correspond to the price and yield performance of the Barclays Capital U.S. 3-7 Year Treasury Bond Index, is up slightly, to $118.74. According to a Bloomberg report, "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 Federal Reserve's 18 primary dealers. The sale was a reopening of an $11 billion offering in April. Conventional Treasuries rallied amid speculation about the amount of debt the Fed may purchase to spur the economy in a strategy called quantitative easing." “It signals people's expectation of the Fed being able to create some inflation with the QE program,” Alex Li, an interest-rate strategist in New York at Deutsche Bank AG, told the news service. “With nominal rates so low, in order have high TIPS breakevens you've got to have negative real yields on the five-year.” TIPS are government bonds that offer coupon payments that are inflation-adjusted. The Bloomberg report notes that "The fixed payment on five-year TIPS, known by traders as the real yield, has been pushed below zero because the increase in the consumer price index is greater than the yield on regular five-year U.S. notes, which has fallen along with other Treasury yields as investors sought the relative safety of U.S. government debt." Thirty-year bond yields dropped three basis points to 3.9 percent at 1:48 p.m. in New York, according to BGCantor Market Data. Yields on 10-year notes fell two basis points to 2.54 percent.