EXCERPTS:
"We all know interest rates are low, but this is ridiculous.
The Treasury Department had no problem whatsoever selling $10 billion in five-year Treasury Inflation-Protected Securities today at a yield of -0.55%. That’s not a typo: the TIPS bonds sold with a negative yield. First time that’s ever happened.
This suggests investors are so terrified of inflation that they’re willing to pay the government money every year to buy insurance against it.
As with everything in the Treasury market, it’s a little more complicated than that. The negative yield owes partly to the fact that plain-vanilla five-year Treasurys yield just 1.16%, which is barely higher than consumer price inflation for the past year.
The spread between the regular Treasury yield and the negative TIPS yield gets you what investors expect inflation to be in the next five years, and that’s a not-horrifying 1.68%.
Still, yields in both TIPS and Treasurys are low partly because the Federal Reserve is expected to buy a truckload of both as part of its drive to fend of deflation. Investors have front-run the Fed, driving bond prices higher and yields lower, some through the looking glass into negative territory.
If negative TIPS yields represent tremors of inflation anxiety, then the Fed is probably thrilled: Inflation expectations make deflation less likely. But those on deflation watch, including some Fed policy makers, say inflation-adjusted yields on longer-dated bonds are still fairly high given the weakness in the economy. QE2 is still coming, possibly meaning more negative TIPS yields.
