U.S. sells debt with a negative yield for 1st time By Richard Leong | NEW YORK | Mon
Oct 25, 2010 3:07pm EDT
Oct 25 (Reuters) - The U.S. Treasury Department on Monday
sold securities that fetched a negative yield for the first
time, implying investors are willing to pay the government
to own its debt.This is a milestone in the current rock-bottom
interest rate environment, as the Federal Reserve is widely
expected next week to announce it will buy more Treasuries
to jump-start a sluggish economy.
Typically, investors buy a new Treasury bond at "par"
or $100. At Monday's $10 billion auction of five-year Treasury
Inflation-Protected Securities (TIPS), they paid more than
$105 and accepted a bond that yields nothing even after
factoring in a 0.50 percent semi-annual interest payment.
"This shows negative yields are not a turn-off to
investors," said Michael Pond, co-head of U.S. rates
strategy with Barclays Capital in New York.
But some analysts cautioned negative yields, if they persist,
could hurt TIPS demand.
"If issuing TIPS in a negative real rate environment
requires zero coupons and up-front premium, we can see that
becoming an issue," said George Goncalves, head of
U.S. rates strategies at Nomura Securities International
in New York.
While a negative yield clearly benefits the federal government
by lowering its borrowing cost, investors bought the five-year
TIPS, which was originally issued in April, on expectations
that the Fed will succeed with another round of policy accommodation,
dubbed 'QE2," analysts said.
If QE2 can raise inflation toward to 2 percent, a level
which Fed Chairman Ben Bernanke recently cited, investors
will profit from a widening in the yield gaps between TIPS
and regular Treasuries. This could happen even if the real
yields on TIPS remain negative, analysts said.
The five-year TIPS "breakevens" was last quoted
at 1.68 percent on Monday, compared with 1.25 percent in
late August.
The Treasury will sell $35 billion in two-year notes on
Tuesday, part of this week's $109 billion coupon-bearing
supply.
The Treasury has been borrowing cheaply since the Fed brought
short-term rates down near zero since December 2008.
It has sold bills at zero percent during episodes of safe-haven
stampedes during the global credit crisis.
In the open market, five-year and other short-dated TIPS
turned negative in late September on bets that increased
bond purchases from the Fed will push down real interest
rates, or borrowing costs excluding inflation.
Fed policy-makers have expressed worries over the threat
of deflation, where a crippling cycle of falling prices
and real interest rates could inflict long-term damage to
an economy like Japan in the 1990s.
If it engages in further quantitative easing in the form
of buying more bonds, the Fed hopes to wipe out deflation
risk and inflate higher asset prices. Rising asset values
could in theory encourage investments and spending and in
turn bolster economic activity to more desirable level.
(Editing by James Dalgleish)