January 18, 2018 / 9:12 PM / a month ago

UPDATE 1-Investors scoop up U.S. inflation-protection bonds

(Adds background, analyst quote)

By Richard Leong

NEW YORK, Jan 18 (Reuters) - Investors on Thursday pounced on $13 billion worth of U.S. bonds that offer them protection from faster wage growth and costlier goods and services as their longer-term inflation outlook rose to their highest in almost a year.

Overall bidding for these 10-year Treasury Inflation Protected Securities was the strongest at an auction in over 3-1/2 years with investors buying nearly 90 percent of the supply.

The robust demand for TIPS marked a growing belief that price pressure is building from improving global demand and pushing domestic inflation to the Federal Reserve’s 2 percent goal.

“The allocation into the (TIPS) asset class has been strong,” said Michael Pond, head of global inflation-linked research at Barclays in New York. “It’s all related to the pickup in global growth.”

Barclays’ Pond said the run-up in TIPS may be overdone in the short term. “Evaluation is getting a bit stretched,” he said.

Earlier Thursday, China, the world’s second biggest economy, said it expanded at a speedier-than-expected pace of 6.8 percent in the final three months of 2017.

Improving business activity around the world has bolstered oil and other commodity prices, reinforcing the view of rising inflation, analysts said.

In the United States, traders are betting the biggest federal tax overhaul in 30 years enacted last month would pump up inflation. Several large U.S. companies including Wal-Mart Stores Inc and Apple Inc said they plan to hike wages and/or pay one-time bonuses due to the steep tax cuts.

Last week, the Labor Department said underlying consumer prices increased 0.3 percent in December for its biggest monthly gain in 11 months.

Against a backdrop that inflation may be heating up, investors have been putting money into TIPS-focused funds whose assets increased to an all-time high of $68.01 billion in the week ended Jan. 10, according to Lipper, a Thomson Reuters unit.

The persistent inflows into these funds stoked demand for the TIPS supply, analysts said.

On Thursday, the latest 10-year TIPS issue cleared at a yield of 0.548 percent, which was the highest yield in two years but below what traders had expected, Treasury data showed.

The ratio of bids to the amount of 10-year TIPS offered was 2.69, which was the highest reading since May 2014.

On the open market, the yield premium of regular 10-year Treasury notes over 10-year TIPS rose to 2.09 percent on Thursday, which was the highest level since February, according to Tradeweb.

Reporting by Richard Leong; editing by Diane Craft and Lisa Shumaker

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