Posted on 10/05/2009 10:53:35 AM PDT by Kartographer
The Treasury Department sold $7 billion in inflation-indexed 10-year notes on Monday to yield 1.510%. Investors bid $3.12 for every $1 of debt sold, compared to an average of $2.10 at the last five sales of similar securities. Indirect bidders, a class of investors that includes foreign central banks, bought 44% of the offering, versus an average of 26% at the last five. This is the first 10-year TIPS reopening since the government changed the way it tallies indirect bids, which substantially raised the proportion of sales going to the group. After the auction, regular 10-year notes pared gains. The yield, which moves inversely to prices, remained down by 1 basis point to 3.21%.
(Excerpt) Read more at foxbusiness.com ...
There are several theories as to why there should be such demand for notes of such a miserable yield, but none of them leave me convinced other than the Fed buying them with freshly printed money.
Nobody knows how this ends.
If they are inflation indexed, then perhaps it is people who are hedging against a severe boost in inflation.
They`ll be snapped up by the primary buyers because a few days later the Fed buys them back from the primary buyers.
Fix is in.
Sure did make gold jump up today.
Does anyone know what the index used for the rate change is?
How high can the interest rate go?
How frequently does it change.
These are suicide, just as the variable rate mortgages were for many Americans.
For bonds such as TIPS, the underlying principal of the bond changes, which results in a higher interest payment when multiplied by the same rate. For example, if the annual coupon of the bond was 5% and the underlying principal of the bond was 100 units, the annual payment would be 5 units. If the inflation index increased by 10%, the principal of the bond would increase to 110 units. The coupon rate would remain at 5%, resulting in an interest payment of 110 x 5% = 5.5 units.
The most liquid instruments are Treasury Inflation-Protected Securities (TIPS), a type of US Treasury security, with about $500 billion in issuance.
Here is the WSJ commentary.. Thanks for the “TIP”...pun intended.
Treasury Inflation-Protected Securities, or TIPS, are securities whose principal is tied to the Consumer Price Index (CPI) . The principal increases with inflation and decreases with deflation. When the security matures, the U.S. Treasury pays the original or adjusted principal, whichever is greater. TIPS pay interest every six months. Figures after periods in bid and ask quotes represent 32nds; 101.26 means 101 26/32, or 101.8125% of 100% face value; 99.01 means 99 1/32, or 99.03125% of face value.
Selling inflation indexed Treasuries are a sign of weakness
Has this ever been done before? Not that I know of
I’ve been watching the markets for ten years, closely for 5. Not 20 years, not 50 years.
The people I know who are highly skilled traders and savvy investors are in unison utterly bamboozled by the current erosion of longstanding relationships between stock prices, earnings, unemployment, gold, and the inflation expectations embodied in bond prices. As am I. It is as if the government has given Goldman Sachs and their mega-computers absolute free rein to pump stock prices in exchange for their commitment to keep buying US debt which is even today apparently unserviceable. One would think this would produce a steady but irresistable destruction in the value of the USD, but then the numbers I see on my screen are lying to me. And yet gold is rising. All with the promise of zero inflation as far as the eye can see. It defies comprehension. I am on one hand hesitant to declare the dominance of this particular conspiracy theory, on another, utterly baffled by this breakdown of accepted financial relationships, and on another, completely respectful of the infinite power of what the Fed/Tsy are doing in the various markets. That’s three hands. I am convinced we have entered a completely synthetic universe of financial inter-relationships and I haven’t the slightest idea of how it unfolds or where it ends. I *DO* know the banks will win. Beyond that, I couldn’t tell you the motivations of the various market participants. Either stocks will continue to move higher and higher and higher and bond rates will continue lower and lower, or, the whole thing will one day collapse into a steaming pile of lock-limit down catastrophic mush. Or both.
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