US Treasury debt prices were close to steady on Tuesday, erasing early losses after solid demand for inflation-protected notes caught many traders off guard amid a weak economic environment. Minutes from the Federal Reserve's December meeting highlighted policymakers' fears that the economy would enter a period of "uncomfortably low" inflation.
But the market's concern seemed to be shifting in the opposite direction, with a sale of $8 billion in 10-year TIPS drawing what analysts said was the strongest demand in eight years. This helped lift prices from an early rout, as did the central bank's increasingly gloomy tone on the economy. The prospect of a prolonged period of rock-bottom borrowing costs also bolstered Treasuries.
"Near zero interest rates will be with us for awhile," said Robert Brusca, chief economist at Fact and Opinion Economics. Benchmark 10-year notes were up just 1/32 and offering a yield of 2.47 percent, down one basis point. Traders paid little mind to data showing a less severe contraction in the services sector than analysts had feared, seeing the modest improvement as a blip rather than the start of a trend.
The TIPS sale was much more interesting. The bid-to-cover ratio, an indication of demand, was 2.48, compared with a ratio of 2.22 at a similar auction in October and the highest since 2000. This showed a certain level of confusion in the markets, where ripe talk of deflation and incipient fears of eventual inflation have begun to coexist.
"I can understand someone really liking TIPS if they have the sense that all this monetary and fiscal stimulus will eventually lead to inflation going forward. Though may be not in the next three or six months or even in a year," said John Spinello, chief fixed-income technical strategist at Jefferies & Co in New York. Shorter-dated notes experienced some selling. Two-years were down 2/32 and yielding 0.80 percent.