NEW YORK, March 4 Returns on some U.S. Treasury
bonds have slipped into negative territory for the first time
ever this week as investors anticipate record commodity prices
will boost the rate of inflation even as the economy slows.
Investors have been scooping up Treasury Inflation
Protected Securities, or TIPS, which peg the principal payout
at maturity on the rate of inflation. Investors are betting
that inflation rate will rise, fattening the return on the
securities and making up for the negative yield.
"TIPS are performing well on an outright basis due to
credit concerns. They are outperforming on a relatively basis
versus nominal Treasuries due to growing inflation concerns,"
said Michael Pond, Treasury and TIPS strategist at Barclays
Capital in New York.
On Tuesday, eight TIPS issues with maturities of five years
and less had negative yields -- an unprecedented event --
according to analysts.
For example, the five-year TIPS issue due April 2011 last
traded a yield-to-maturity of minus 0.32 percentage point. This
meant that traders see inflation as measured by the
government's Consumer Price Index running at about 2.30 percent
between now and when this TIPS issue matures.
That level is also well above the top end of the Fed's
perceived comfort zone for core inflation of around 2 percent.
Meanwhile, longer TIPS yields have remained positive with
the 10-year issue due January 2018 last traded at 1.08
For now, the negative impact on bonds from a spike in
inflation risks has been overshadowed by the broad decline in
yields as a result of the Federal Reserve's rate-cutting
campaign and safe-haven demand for Treasuries stemming from the
So far this year, regular Treasury securities have
generated positive albeit modest returns for investors,
compared with the whopping losses in the stock market. The
Standard & Poor's 500 index .SPX is down 9 percent and the
Nasdaq .IXIC is off nearly 16 percent.
TIPS, given their inflation protection feature, have fared
Through Monday, the year-to-date total return on TIPS was
5.43 percent and on Treasuries 3.75 percent, according to
While government bonds have done well, sustained negative
yields will erode the gains fueled by Fed's rate cuts and
safe-haven demand, analysts said.
"A negative consequence of negative real interest rates is
inflation, a consequence seen in earnest recently," Tony
Crescenzi, chief bond market strategist with Miller Tabak &
Co., wrote in a research note.
(Reporting by Richard Leong; editing by Gary Crosse)