In Bond Frenzy, Investors Bet on Inflation...
Read more …In Bond Frenzy, Investors Bet on Inflation
By CHRISTINE HAUSER
Published: October 25, 2010
THE NEW YORK TIMES
At a time when savers complain that they are earning almost no interest from their bank accounts, some investors on Monday bought United States government bonds that effectively had a negative rate of return.
Bizarre as it sounds, that is correct. In an auction of a special kind of five-year Treasury bond, investors paid $105.50 for every $100 of bonds the government sold — agreeing to pay the government for the privilege of lending it money.
The reason is that these types of bonds offer a guaranteed protection against inflation. So, if inflation soars — as some economists worry might happen, with the government seeking to give the economy a boost by flooding it with money — the value of the bonds would go up accordingly.
The investors who took part in the $10 billion auction are betting that inflation, now at about 1 percent annually, will rise to a level that more than compensates for the premium they paid.
The unusual auction on Monday “reflects a condition in the Treasury market that has been in place for months, chiefly that yields on shorter maturities have moved below the inflation rate,” Anthony Crescenzi, a senior vice president at the bond giant Pimco, wrote in a research note.
Guy LeBas, the chief fixed-income strategist for Janney Montgomery Scott, said there were about $28 billion worth of bids for the notes. About 40 percent were foreign buyers, 57 percent dealers and the rest were possibly retail investors, he said. The prediction is for a 1.58 percent rate of inflation, as measured by the Consumer Price Index.
“It was good demand considering the negative yields,” he said. “They are counting on the Fed to be successful in generating inflation.”
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