iShares Lehman TIPS Bond (ETF) (TIP)

Treasurys gain ahead of major 10-year auction

By Deborah Levine, MarketWatch

Last Update: 10:19 AM ET Nov 10, 2009

NEW YORK (MarketWatch) -- Treasury prices rose Tuesday, pushing yields lower, as bond traders predict strong demand for the government's sale of a record $25 billion in 10-year notes during the session.

Yields on the current 10-year note (UST10Y) fell 4 basis points to 3.45%.

Two year note yields (UST2YR) declined 1 basis point to 0.84%.

Bond prices move inversely to their yields. A basis point is the equivalent of one one-hundredth of a percentage point.

The auction follows a very strong reception given to Monday's sale of 3-year notes (UST3YR).

Besides a very large portion of that record $40 billion sale going to non-dealers -- meaning investors that want to hold the new debt -- the bidding broke another metric for the first time for the maturity, something that's also rarely seen with other maturities, according to Wrightson ICAP.

Non-dealers bid for $47.1 billion at Monday's offering -- "the first time that customer bids by themselves have been large enough to cover a 3-year note auction entirely," analysts at Wrightson wrote in a research note.

That's better off for the broader bond market because primary dealers often have to turn around and sell the debt, putting pressure on prices.

Recent interest in 10-year sales
"The Treasury has had almost no trouble bringing its debt to market which speaks to a variety of things, not the least of which is nervousness about the economic and inflationary landscape going forward," said Dan Greenhaus, chief economic strategist at Miller Tabak. "At some point sentiment may change, but there is once again nothing to suggest that today is the day this will change."

Bids on the 10-year notes are due by 1 p.m. Eastern time.

In the last four sales of new 10-year notes, investors bid for 2.34 times the amount of debt sold, according to RBS Securities, one of the 18 primary government security dealers required to bid at Treasury auctions.

Indirect bidders, a class that includes foreign central banks, bought 45.7% of the last sale of new 10-year notes in August -- the only sale that followed a change in how bids are tabulated, which dramatically affected the statistic looked at by the market to gauge demand.

The Treasury will also sell a record amount of 30-year bonds (UST30Y) on Thursday. Bond markets are closed on Wednesday for Veterans Day, which some traders worried may reduce liquidity.

Banks buying Treasurys
Besides foreign investors, the Treasury has been receiving a healthy buying interest from banks, said strategists at primary dealer HSBC. Lots of data indicate banks are sitting on loads of cheap money in reserves and still hesitant to lend to anything but the safest corporate or individual borrowers. So instead, they buy Treasurys and make money on the difference between near-zero borrowing rates and the bond yields, even if the yields seem measly to many investors.

That demand from banks will help absorb growing government-debt issuance, said strategists at HSBC, in a report. They will also help replace purchases by the Federal Reserve during this year to help grease the wheels of the credit market. The Fed's $300 billion purchases of Treasurys accounts for about 16% of the U.S. debt sold during fiscal 2009.

"Rising bank demand is set to replace the Fed's purchases of Treasurys," analysts wrote.

HSBC expects Treasury issuance to rise to $2.4 trillion in the 2010 fiscal year ending next September.

And with the widening gap between short- and long-term yields, banks have moved into more longer-dated securities in search of higher yields -- which is key when the government has said it will shift towards longer-dated debt and away from selling short-term bills.

Also, banks hold far less of their assets in Treasurys than in previous recessions: less than 1% compared to an average of 5% to 7%, HSBC said.

"To restore holdings to anywhere close to this level would mean a sustained level of demand," analysts said.

Also on Tuesday, analysts will also be listening to speeches by a handful of Fed officials.

Dennis Lockhart, the president of the Atlanta Federal Reserve Bank said the banking system is still far from being fully recovered and will be hampered by weakness in the commercial real estate sector. But for the overall economy, the commercial real estate sector should not be a "show stopper" but just a headwind on growth, he added.

yields too low.

I am predicting bond will outperfrom equities for the next few years. My reasons are as follows:

The S&P is way overpriced, the P/E ratio is above the historic median.

David Rosenberg points out the S&P has priced in 4% GDP growth for 2010 while the bond market has priced in 2%.

More than 100% of the economic growth we have seen in 2009 has been the result of government spending. This cannot continue forever. If you take away government spending in 2009 real GDP would be down around 6%

While firms have been "beating" earnings estimates those estimated have been DRASTICALLY cut down over the past year.

Lastly if you look at the S&P 500 earnings have been made by cutting costs, as revenue is down. You can only cut costs (lay off people) for so long, eventually you have to sell more.

Investors will not receive a single cent from this ETF. If there is inflation, the government will lie and say that we really have deflation.

inflation fears less as consumer spending remains weak
profligate government spending makes treasuries too risky.

Still think this is a bear market Rally!!

The many big reasons why the economic recovery will take two years or more might mean the big rise in stocks since early March won't hold. TIP is insurance against big losses if this happens.

We are printing dollar bills like never before.
Right now, the banks are hoarding them and repairing their own damages. But soon, they'll start lending them out and the economy will pick up, and -- hold on to your hats!

safety

Easy protection against inflation and a ~5% dividend yield makes this a convenient hedge in an uncertain equities market.

Inflation will increase dramatically once the economy picks up steam

Inflation protection ETF. It's a bet that we'll see inflation in the next five years.

Screw gold for inflation hedge, too many folks at that party.

he's paying about 7.5%. inflation IS coming.

If you believe we are not inevitably headed into a second Great Depression, then your estimate of the concomitant inflation expectations for over the next 10 years is probably higher than the market is estimating, and you might conclude that TIPs are probably priced way too low right now.

Some mere few have started to worry out loud about inflation being an issue RIGHT NOW, including me. The fact that inflation concerns are being raised mostly by the nearly extinct dinosaur-economists of the Chicago School should not confuse us into thinking they may be entirely wrong. They may be wrong about the timing of when inflation will come, and as a result this pick may be way too early, but I like the 6% return these bonds are currently paying, and I can wait.

Basically, I'm betting that inflation-complacency has created a distortion in the market's pricing for TIPs. I understand how pushing inflation to the back burner was rational because the devil that has been the bigger threat was the deflationary spiral, but if that sentiment around inflation turns around, this EFT will pop.

So, either because bad inflation is closer than we think, or because bonds are under priced for the given real inflation right now, I expect these to hold their value and maybe pop with increased demand for the underlying bonds.

I am buying TIPs for my real portfolio, and watching this in CAPS!

A hedge against my overall bear outlook for T-bills in general, at least short term.
$100.62 0.12 (+0.12%)
4/23/2009 12:00 PM
iShares Lehman TIPS Bond (ETF) (TIP)

bond play

how can i invest in government tips directly. These guys just copy it or something and is not the real tips bonds.

Protection from inflation and no risk of default. There are not a lot of other options, and I think that financial advisers will want to put some of this into their clients' portfolios, as I have in mine. Should not gyrate as wildly as gold, although gold has potentially a larger return.