TREASURIES-TIPS prices fall as inflation not a concern

Thu Apr 18, 2013 6:20pm EDT

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By Luciana Lopez

NEW YORK, April 18 (Reuters) - Prices of Treasuries designed to protect investors from inflation dived on Thursday as a weak auction and a spate of disappointing economic data reflected dwindling fears of inflation.

Yields on the 5-year TIPS, or Treasury Inflation-Protected Security, hit their highest since late January after investor interest proved soft in the government's auction of $18 billion in the notes in the afternoon.

"The rest of the TIPs market is having a mini implosion since the auction, as real yields on TIPS have jumped 8-10 basis points across the curve in what appears to be a 'get me out' trade," TD Securities interest rate strategist Richard Gilhooly wrote in a research note.

"This is very much a panic trade and with large players dominating the market, it is not clear that if the pain gets much worse the liquidity will be there to support the market," he added.

The five-year yield hit as high as -1.538 percent before more recently trading at -1.547 percent. The high yield in the auction was -1.311 percent.

The bid-to-cover ratio, which gauges overall auction demand, came in at 2.18, the lowest since a five-year TIPS auction held in October 2008. At that auction, the bid-to-cover ratio was 1.81.

"That was a very rich part of the TIPS curve. It never cheapened," said Chris McReynolds, head of U.S. Treasury trading at Barclays in New York.

Between soft economic data and a recent sell-off in commodities, he said, "it's definitely made people less worried about inflation."

Investors in U.S.-based funds dedicated to TIPS pulled out a net $72 million in the week ended April 17, according to data from Thomson Reuters Lipper service on Thursday.

That was the fifth week of net outflows in the past six weeks, the data showed.

Prices for nominal Treasuries rose as lukewarm data pointed to a long slog of a recovery in the world's biggest economy, fueling bids for safe-haven investments.

The number of Americans filing new claims for unemployment benefits rose last week and factory activity in the nation's Mid-Atlantic region cooled in April, further signs of a moderation in economic growth.

"Over the last month to month and a half, the bond market has anticipated that we are entering a soft patch, and today's economic statistics were mostly soft and supported that view," said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management in Minneapolis.

"We're now just on the edge of seeing some of the negative impact from the sequestration (federal budget cuts) and we'll see more of that potential impact this month," he said. "We don't think sequestration creates a huge headwind, but it nonetheless is a headwind."

The benchmark 10-year Treasury note traded 4/32 higher in price to yield 1.686 percent, just above Wednesday's intraday low of 1.673 percent, the lowest in over four months.

The 30-year bond rose 12/32 to yield 2.863 percent, compared with 2.88 percent late on Wednesday.

Prices were supported by the Federal Reserve's purchase of $3.38 billion of Treasuries maturing between May 2020 and February 2023 as part of its quantitative easing monetary stimulus program aimed at fostering economic growth and cutting unemployment.

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