U.S. inflation bond sale fetches negative yield

They bought $15 billion worth of 10-year Treasury Inflation-Protected Securities at a negative yield at an auction for the first time in the 15 years since TIPS were introduced.

These latest 10-year TIPS cleared at a yield of minus 0.046 percent, lower than what traders had expected.

This meant investors essentially paid the U.S. government to own 10-year TIPS at a time when some of them have been hoarding Treasuries including TIPS due to fears about Europe's debt crisis spiraling out of control.

"It's a safe-haven play. It's all about the return of capital rather than the return on capital," said Richard Schlanger, a portfolio manager at Pioneer Investments USA in Boston.

The yield on U.S. 10-year Treasury Inflation-Protected Securities has set a series of record lows in negative territory in recent days on this intense safe-haven demand.

Even tame December readings on the government's Consumer Price Index, which TIPS principal and interest payments adjust against, did not cool the bidding for these pricey securities.

The total accepted bids for the 10-year TIPS issue to the amount offered came in a ratio of nearly 3-1, which is the strongest since an auction last March.

The U.S. Labor Department said on Thursday the CPI, its broadest inflation gauge, was unchanged last month and the core rate which excludes volatile energy and food prices rose 0.1 percent. Analysts polled by Reuters had forecast both the headline and core readings to rise 0.1 percent.

For the year, the CPI rose 3.0 percent and the core rate increased 2.2 percent.

While there is no evidence of price pressure building in the U.S. economy, some traders are betting that more measures from the Federal Reserve aimed to help housing and jobs would eventually spur inflation from its current sluggish level, analysts said.

"The reason for TIPS buying as of late has been fear that the Fed's policies will lead to inflation further down the road," said Gennadiy Goldberg, fixed income analyst at 4Cast Ltd in New York.

The 10-year breakeven rate, or the difference between the 10-year TIPS yield and the 10-year regular Treasury note yield, touched its highest level since late October after the strong 10-year TIPS auction.

This proxy on investors' long-term inflation expectations hit 2.13 percent before slipping to 2.11 percent in late trading. It was still up nearly 5 basis points on the day.

The 10-year TIPS yield was last bid at minus 0.164 percent, up 3 basis points from Wednesday when it touched a record low of minus 0.244 percent, according to Tradeweb.

A broad rise in TIPS breakeven rates has boosted their total return, making TIPS one of top bond investments in early 2012.

Barclays Capital's TIPS index has risen 0.89 percent through Wednesday. This put them third behind its municipal bond index which has climbed 1.90 percent and its junk bond index which has increased 1.36 percent.

(Editing by James Dalgleish)