Give me inflation protection or give me…

The reopening of the Jan 10 yr TIPS auction was solid. The yield was 4 bps below the level it was trading just prior and the bid to cover of 3.43 is the highest on record and well above the average over the previous 12 auctions of 2.25. The large demand for inflation protection is clearly evident in today’s auction as commodity prices break higher after the good data seen over the past week and also in the face of booming supply of conventional, non inflation protected paper. Because of the lack of inflation protection, the auctions Wednesday thru Thursday will be very important in terms of investor appetite for nominal yields at the highest level in years. The 3 yr tomorrow will be more influenced by Fed action where most in the FOMC still don’t see any inflation pressures.

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