Long-dated Treasury prices fell following a weak auction of $8 billion in 30-year Treasury inflation-protected securities, the first leg of $126 billion in government debt sales this week.Market participants use the difference between the yield on conventional bonds and tips = the breakeven inflation rate as the best proxy for the market's inflation expectation. After all, compared to the scribblings and prognostications of analysts this is something people are putting real money behind.
In the first sale of 30-year TIPS in nearly a decade, the government on Monday had to pay to find a home for the securities, though demand was solid at the higher yields.
The absence of a 30-year TIPS sale for some time may have hurt the market's ability to gauge pricing for the auction, traders said.
Timing was also an issue: The sale came after a muted consumer-price-inflation report Friday, which showed the core gauge unexpectedly dropping for the first time in 28 years.
"If you look at the auction under a microscope, it would be considered a bad auction," said Michael Pond, interest-rate strategist at Barclays Capital Inc. That was mostly because of the gap since the last issuance, he said.
"It just created uncertainty, and investors tend to take less risk in uncertain environment," Mr. Pond said.
Monday, the 10-year note was down 4/32 to yield 3.797%. The 30-year bond was down 15/32 to yield 4.731%. The two-year note was up 2/32 to yield 0.891%.
The yield on the new 30-year TIPS came in more than 0.06 percentage point higher than dealers expected—it "tailed," in market speak. The 30-year TIPS came in at a yield of 2.229%, above the 2.164% the market was expecting before the auction. Bond yields rise when prices fall.
So based on the 30 year concentional bond yield of 4.731% and the TIP yield of 2.229% on gets an inflation forecast by treasury bond market participants of 2.44%. Interestingly that is very close to the Feds long term inflation target of 2.5%,
I generally pay great respect to the message that Mr. Market is sending. Certainly alot more than to those buy gold inflation is coming ads on tv and radio.