Bid-to-cover ratio hits highest since April 2024
Indirect bidders rise, suggesting higher foreign demand
Dealers take in 6.5% of issue, lowest uptake in a year
Adds analyst comment, details, byline, bullets
By Gertrude Chavez-Dreyfuss
NEW YORK, June 17 (Reuters) - The Treasury's sale of $23 billion in reopened U.S. five-year Treasury Inflation-Protected Securities $(TIPS)$ showed strong demand on Tuesday, as investors worried about rising prices given the recent escalation in geopolitical tensions in the Middle East.
The latest conflict between Israel and Iran caused a spike in U.S. crude futures last Friday, continuing a trend on Tuesday, up 3.7% at $74.1 per barrel CLc1 and stoking inflation concerns.
On Tuesday, the Israel-Iran war has escalated. President Donald Trump said U.S. patience was wearing thin but it had no immediate intention to "take out" Iran's leader, while indicating he could dispatch diplomatic envoys as the Israel-Iran air war raged for a fifth day.
The TIPS auction priced at a high yield of 1.650%, lower than the market's forecast in when-issued trading at the bid deadline, suggesting no premium was needed to take down the note. The previous three auctions were poorly subscribed, with the high yield exceeding the expected rate. In bond market terminology, those auctions had "tailed."
The five-year TIPS yield
The ratio of bids to the amount of five-year TIPS issue offered, a gauge of demand, was 2.53, the highest reading since April last year.
"The gathering inflationary risks given the rising geopolitical tensions helped support today's auction and offset the potential concessionary implications that may have resulted from the fact that today's auction was the largest five-year TIPS reopening on record," said Vail Hartman, U.S. rates strategist, at BMO Capital in New York.
Larger debt supply typically is harder to absorb for market participants.
Other auction numbers were also strong.
Indirect bidders, which include foreign central banks, were awarded 74% of the issue, up from the 64.2% in the April auction, and the 51% during the December sale.
Primary dealers just took on 6.5% of the total allocation, much lower than 18.1% they took in April and the 25.4% they had to absorb in December. Tuesday's dealer uptake was the lowest since June 2024.
Lower participation from dealers is a good thing, which means that there was strong appetite for this note across the board that they did not have to step in and absorb the rest of the issuance.
Dealers in general do not like to hold a whole load of Treasuries because it expands their balance sheets, requiring higher leverages and therefore more capital.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Alden Bentley, Chizu Nomiyama and Nick Zieminski)
((gertrude.chavez@thomsonreuters.com; 646-301-4124))