October 31, 2018 / 5:20 PM / 20 days ago

UPDATE 1-U.S. 5-year TIPS yield hits 9-year peak as supply changes

* TIPS 30-year yield reaches highest since Jan. 2016

* TIPS rattled with rest of bond market in October (Adds quote, graphics)

By Richard Leong

NEW YORK, Oct 31 (Reuters) - The yield on U.S. five-year Treasury Inflation Protected Securities rose to a nine-year high on Wednesday as the government, as expected, said it will hold an additional five-year TIPS auction and will drop a 30-year TIPS auction in 2019.

Thirty-year TIPS yield retreated after hitting its highest since January 2016 following the federal government’s refunding announcement for November.

The U.S. Treasury Department’s change in TIPS issuance is part of the government’s broader borrowing scheme to finance a widening budget gap due to a massive tax cut enacted last December and a federal spending agreement reached in February.

“The move was largely telegraphed. The TIPS market did react a bit. It will be interesting to see how much liquidity you can cram into the five-year sector,” said Com Crocker, senior inflation strategist at New Century Advisors based in Chevy Chase, Maryland.

At 1:03 p.m. (1703 GMT), five-year TIPS yield was 1.050 percent, up about 3 basis points from late on Tuesday after touching 1.077 percent, its highest since September 2009, Tradeweb data showed.

Thirty-year TIPS yield climbed to 1.319 percent, which was its highest since January 2016 before subsiding to 1.284 percent, marginally higher on the day.

The TIPS sector had a rough October as the bond market was roiled by stock market turbulence, lower oil prices and bets on further interest rate increases from the Federal Reserve.

“It’s been a rough month for TIPS. TIPS have given back a lot of their year-to-date outperformance versus nominal Treasuries due to the risk-off trade, energy weakness, and ongoing Fed tightening,” Crocker said.

Oil prices fell from four-year highs reached in early October. They were poised for their worst monthly performance since July 2016.

As of Monday, TIPS produced a month-to-date loss of 1.16 percent, steeper than the 0.22 percent drop for nominal or regular Treasuries, according to indexes compiled by Bloomberg and Barclays.

On an annual basis, TIPS were down 0.94 percent, compared with a 1.73 percent loss for nominal Treasuries.

Reporting by Richard Leong Editing by James Dalgleish

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