TIPS

July 27th, 2009 11:52 am | by John Jansen |

The treasury will auction $ 6 billion 20 year TIPS at 100PM New York time. The auction is a reopening of an outstanding issue.

Buyers of TIPS focus on the real yield. The range for the year has been 1.95 to 2.60 and the current 2.30s is mid range. One dealer (from whom I am deriving much of what you are reading here) suggests that we are mid range versus Europe and somewhat rich to the UK.

The same dealer notes that inflationary expectations have increased of late and that the increased demand for protection has offset the usual concession for supply. The writer noted that the demand has manifested itself in the long end and there is better value down the curve.

In the long end the issue has cheapened up to the issues which surround it.

I think that the auction will go well today. There are only $ 6 billion and it would not take much of an effort to stop the issue close to the market. I would expect a small tail but no debacle.

Separately, William O’Donnell at RBS Securities (the firm formerly known as Greenwich Capital) noted that the treasury recently sent a questionnaire to dealers which suggested to him that the Treasury was considering increasing issuance of TIPS.

The Treasury is bumping upp against levels in the regular coupon offerings at which significant increases in size become difficult and investor’s appetites will be challenged. If the Treasury increased TIPS offerings sizes that would relieve the Treasury from offering unmanageable size in the nominal bond offerings.

I believe however that the dealer community recently suggested to the Treasury that the TIPS program should be curtailed as the bonds are an island of illiquidity in the Treasury market. It is my understanding that these bonds trade somewhat actively in the runup to the auctions and then for a week or so following as some distribution occurs. For the remainder of the quarter they are a backwater.

One of the problems is that there is no other TIPS market (other than other sovereign names) . I do not know of any corporate issuance and consequently they are difficult to hedge.

The salient point is that if the Treasury is planning to turn to TIPS for an increasing share of its funding, they are in worse shape than I would have believed.

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  1. 3 Responses to “TIPS”

  2. By Rick Arvielo on Jul 27, 2009 | Reply

    Thanks for the information

  3. By David Merkel on Jul 27, 2009 | Reply

    >>The salient point is that if the Treasury is planning to turn to TIPS for an increasing share of its funding, they are in worse shape than I would have believed.<<

    You hit the bulls-eye on that one.

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