Yesterday, the Financial Times website, FT.com, reported that $13 billion of 10-year Treasury inflation-protected securities were sold at a negative yield of -0.089 percent at this week’s Treasury auction.
The interest rate on these particular TIPS was 0.125 percent; investors paid a premium of $102.23 for every $100 worth of bonds. Paying the extra $2.23 pushed the yield down to -0.089 percent.
Why would otherwise rational people pay for bonds that are, on the surface, guaranteed to lose money? In a word: inflation. TIPS pay more as inflation rises, thanks to the Consumer Price Index-linked component that adjusts the principal twice per year.