Treasuries rise fourth day before manufacturing data, TIPS sale

China, Europe

A preliminary index of China’s manufacturing was 47.8 for September, versus 47.6 last month, according to HSBC Holdings Plc and Markit Economics. A similar index of euro-area manufacturing was 46 this month, versus 45.1 in August, separate data showed. Readings less than 50 indicate contraction.

The yield on 10-year TIPS fell two basis points to negative 0.80 percent after declining to an all-time low negative 0.86 percent on Sept. 17. The yield hasn’t closed above zero this year, signaling investors who hold the securities to maturity will receive less than they paid to buy them, after accounting for the rate of inflation over the period.

Investors bid for 2.62 times the amount of debt offered at the previous sale of the securities on July 19.

An index of TIPS has returned 0.5 percent this month as of yesterday, according to Bank of America Merrill Lynch indexes. The U.S. Treasury Master Index has fallen 1 percent over the same period, the gauges show.

Inflation Bets

Fed Bank of Dallas President Richard Fisher said yesterday the central bank’s asset purchases have led to an increase in market expectations for quicker inflation. The Fed said last week it would buy $40 billion of mortgage-based securities a month to put downward pressure on borrowing costs.

The difference between yields on 10-year notes and similar- maturity TIPS, a gauge of expectations for consumer prices over the life of the debt, widened to 2.73 percentage points on Sept. 17, the most in six years.

“Demand for TIPS will remain strong,” Mikael Nilsson, an analyst at Barclays Plc’s investment-banking unit in London, wrote today in a note to clients. “Investors will continue to diversify some of their nominal exposure into real assets in light of the unconventional and dovish Fed monetary policy.”

The central bank is also swapping shorter-term Treasuries in its holdings with those due in six to 30 years. It plans to sell as much as $8 billion of debt maturing from June to August 2015 today as part of the program, according to Fed Bank of New York’s website.

Investors should favor shorter maturities because they will fall less if inflation quickens, said Yoshiyuki Suzuki, head of fixed income in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $73.1 billion in assets.

“The Fed may allow some inflation,” he said. “The actual rate is stable, but inflation expectations are going up.”

The Treasury is scheduled to announce today the size of two-, five- and seven-year auctions scheduled for next week.

Bloomberg News

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