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Tuesday’s Weaker Sale of 10-Year Treasury Inflation-Protected Securities Reflects Inflation Concerns

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Andrew R. Michaud

November 21, 2023

On Tuesday, investors had the opportunity to purchase $15 billion worth of 10-year Treasury inflation-protected securities (TIPS). These securities are U.S. government debt instruments whose value fluctuates along with inflation. However, the auction results indicated a lack of demand, suggesting that traders believe inflation will continue to decelerate.

The auction concluded with a yield of 2.18% at the upper end, marking the highest yield offered on 10-year TIPS since January 6, 2009. Primary dealers, who step in to purchase unsold securities, had to accept a significant portion of the debt, amounting to 13.6% of the total offer. This acceptance rate is notably higher than the average of 7.3%.

Buyers likely avoided the 10-year TIPS due to indicators showing a continued slowdown in inflation. In October, consumer prices rose by 3.2% compared to the previous year, a decline from rates of 3.7% in both September and August.

The decreasing pace of inflation since its peak last year has bolstered market confidence in the Federal Reserve's ability to control prices over the long term. While this is positive for the U.S. economy as a whole, it diminishes the appeal of TIPS securities at this stage in the economic cycle. Ben Jeffery, a strategist at BMO Capital Markets, points out that it erodes the intrinsic value of inflation protection.

Following the auction, all three major stock market indexes experienced slight declines. The S&P 500 dropped by 0.3%, compared to its pre-auction decline of 0.12%. The tech-heavy Nasdaq Composite saw a 0.7% decrease, while the Dow Jones Industrial Average fell by 0.2%.

The recent trend of weak government bond auctions has resulted in higher bond yields and downward movement in stock indexes. However, an exception was observed when the 20-year standard Treasury auction on Monday garnered strong investor interest.