Inflation-wary investors flock to U.S. TIPS supply

November 17, 2016 3:44 PM EST

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By Richard Leong

NEW YORK (Reuters) - Investors who are uneasy about inflation from possible tax cuts and federal spending under a Trump administration on Thursday scooped up a hefty chunk of the $11 billion of 10-year Treasury Inflation Protected Securities the government offered.

The yield on the latest 10-year TIPS supply the U.S. Treasury Department offered was 0.369 percent, which was the highest at a 10-year TIPS auction since January.

Bond yields worldwide have risen sharply, wiping out a more than $1 trillion loss in market value following Trump's surprise U.S. presidential win. Earlier this week, the benchmark 10-year Treasury yield rose to 2.30 percent, its highest level in 10 months.

Traders have piled on bets that Trump would make good on his campaign promise of massive fiscal stimuli in a bid to create jobs and boost investments at home.

Investors have been wary of a possible surge in federal borrowing to support these stimulus programs, which have led them to put more money into TIPS in an effort to hedge against faster inflation.

On Thursday, the government's consumer price index rose 0.4 percent for its biggest monthly increase in six months in October.

A key gauge of investor appetite at Thursday's 10-year TIPS sale was the share indirect bidders bought.

The Treasury awarded this group, which includes fund managers and foreign central banks, 72.50 percent of the 10-year TIPS supply, their third biggest share on record, analysts said.

"The strength of the indirect bid is typically associated with the strength of investment fund demand," Stone & McCarthy Research Associates' market strategist John Canavan wrote in a research note.

U.S.-based TIPS funds saw $1 billion in inflows in the week ended Nov. 9, marking the funds' second-biggest inflows since records began in October 2002, data from Thomson Reuters' Lipper service showed last week.

Some investors cautioned TIPS, while offering inflation protection, lose money in a rising yield climate like any bond.

BlackRock's iShares TIPS exchange-traded fund has lost about 1.8 percent since the Nov. 8 U.S. election. It was last down 0.05 percent at $113.62 a share late Thursday.

"You'll see healthy TIPS demand for the time being," said K.C. Nelson, managing director at Driehaus Capital Management at the Reuters Investment Outlook Summit in New York. "TIPS is one of the least bad places to be."

(Reporting by Richard Leong; Editing by James Dalgleish and Andrew Hay)

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