The 10 yr TIPS auction was good as the yield was about in line with expectations but the bid to cover at 2.65 is above the ’09 average of 2.59 and the average over the past 2 yrs of 2.30. It’s the 2nd highest going back to 2000. Indirect bidders totaled 40.7% which is below the prior two however. Ahead of the auction, the implied inflation rate in the 10 yr TIPS was 2.45% which means if one believes inflation will run above that over the next 10 yrs on average then buy inflation protection and vice versa. The rate is up almost 30 bps in the past month. Thus, demand for this auction has much different dynamics than what we will see the rest of the week when the Treasury sells 10 and 30 yr maturities Wed and Thurs. With these auctions, investors will have no inflation protection and must rely on faith that the Fed will maintain the purchasing power of the US$.

Category: MacroNotes

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4 Responses to “Demand for some inflation protection is pretty good”

  1. DL says:

    The notion that inflation will run only 2.45% over the next 10 years is laughable. (Even if food and energy are excluded).

  2. TrickStyle says:

    At drinks with a few traders the other night, they were concerned about deflation over the near(er) term. Yikes.

  3. [...] demand for inflation protection in US – Big Picture , Donald [...]

  4. Mike S says:

    We have huge risks for deflation in the near term. As the spending goes away over the next 2 quarters, this inflationary pressure will go away, but we will still have 10% unemployment and the lowest % of population in the work force in a generation. Even with all of this spending, inflation is at what 2.8%?

    We’re staring deflation in the face right now, and we don’t know how to fix deflation. With inflation we may not like the cure, but at least we have one. With deflation, we do not have a clear cut cure.

    Right now, I would be very surprised if inflation was over 2% for the next ten years, especially if the Euro lasts.