Anticipation in the investor community is high for next Tuesday's reopening of the 20-year Treasury inflation-protected security. In the nascent TIPS universe, the sale will have a greater impact on duration and liquidity than in the nominal Treasury market, especially as investors search for ways to go further out on the yield curve in the current rising-rate environment.
Last Thursday's 10-year TIPS auction had a relatively weak bid-to-cover ratio of 1.88, compared with an average TIPS bid-to-cover of 2-2.5. Some foresee that the 20-year may also face weak demand since this is a reopening of an existing security, according to Matthew Tucker, fixed-income strategist at Barclays Global Investors.
Index funds are said to be gearing up to participate in the auction, since it will lengthen duration of indices and offers a rare chance to get long TIPS paper. State Street Global Advisors, for one, will buy at the auction. Jim Hopkins, principal in Boston, said he may buy approximately $76 million in TIPS at the auction to keep his $2.75 billion U.S. TIPS Index Funds' duration in line with its index, the Lehman Brothers U.S. TIPS Index. He expects the reopening to increase duration by about a quarter of a year, raising his index's duration from 6.4 to 6.65 years.
But while State Street is jumping the gun to keep pace with its index, Tucker said he has not yet decided if BGI will participate in the auction. "I haven't heard a real compelling case why the 20-years would do better in the secondary market," he said.
