A bond market rally in the days preceding last week's auction of $12 billion of five-year Treasury Inflation-Protected Securities (TIPS) may have actually weakened demand for the sale, which was the first of five-year TIPS since 1997. That the overall market was perceived as being too rich is being blamed for the auction's relatively tepid demand. Overall, it had a low bid-to-cover ratio of 1.80 and a yield that was three basis points higher than the yield implied by the when-issued spread, according to Mark Mahoney, government bond trader at UBS.
Strategists blamed the low demand on the richness of the five-year curve. "The five-year sector curve is relatively rich right now in part due to the run up in energy prices, and such a low coupon is unattractive from a cash flow point of view," according to Joseph Shatz, a senior government strategist at Merrill Lynch. The yield on the five-year inflation-protected security is 0.95%.
However, Mahoney said the paper was easily distributed after the auction and did not cheapen in the afternoon trade.
The auction's bid-to-cover ratio of 1.80 was weak compared to the demand for the $9 billion 10-year TIPS auction on Oct. 7, which had a bid-to-cover ratio of 2.44. However, it was in line with the demand of other TIPS auctions held this year, whose bid-to-cover ratios ranged from 1.49 to 1.95, according to research by Cantor Viewpoint.
Ward McCarthy, managing director of Stone & McCarthy Research Associates, does not see the weak demand for the five-year as a foreshadowing of TIPS demand going forward. "It was somewhat typical of a TIPS auction, where the buy-side presence is stronger than a Treasury bullet auction, and the sell-side was somewhat cautious," McCarthy said.
