The Treasury is expected to issue $75 billion of Treasury Inflation-Protected Securities (TIPS) for the upcoming fiscal year, which would be a significant increase versus fiscal-year 2004 issuance of $51 billion.
A large part of the increase will come if the Treasury continues with a full funding schedule of the five- and 20-year TIPS, which were introduced this calendar year, according to Alex Li, interest rate strategist at Credit Suisse First Boston. The first ever five-year TIPS auction will be held this Tuesday; the Treasury is set to announce its issuance schedule for the next quarter on Nov. 3.
This year's issuance has been comprised of mainly 10-year TIPS, according to Steve Meyerhardt, spokesman for the Bureau of the Public Debt. The first 20-year auction was held in July and raised $11 billion.
Inflation-protected securities are also growing as a proportion of overall government borrowing. The percentage of TIPS to other Treasuries will reach 10.5% next year if the full funding schedule is reached, which would be the highest percentage since the TIPS program was launched in 1997, according to Li. He attributes increasing investor interest in TIPS to improving liquidity and said there should be enough demand to absorb the extra issuance.
Primary dealer transactions in TIPS have increased to $5.4 billion daily in 2004, up 46% from last year, according to the Federal Reserve Bank of New York. The figure is also more than double the activity of the previous year.