USDi: Nominals suck out any joy to be found in 10y TIPS auction

Against a series of cross currents, BEs traded softer into and out of today’s $17bn 10y TIPS auction before a late-day bid lifted them off the lows.

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  • Nominals suck out any joy to be found in 10y TIPS auction

  • Barclays: NSA CPI profile revised higher

  • HSBC: Favor steepening opportunities for the yield curve


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    Nominals suck out any joy to be found in 10y TIPS auction

    The U.S. inflation asset class started the day in a bad mood and things only got worse because of or possibly despite of $17bn newly-minted 10y TIPS being thrown into the mix this afternoon.   


    To be sure, a series of cross-currents (i.e. hawkish ECB 50bps hike, good tech earnings, weak Philly Fed) kicked off a choppy start to nominals as risk sentiment opened up on the backfoot this morning.  And while risk sentiment steadily improved into this afternoon’s 10y TIPS auction, nominals kept on rallying and the energy complex sulked lower, leaving TIPS breakevens limping lower into the auction.


    As for the TIPS auction itself, it pretty much stopped on the screws with a 0.63% stop-out yield.  But that result hid a rather paltry bid-to-cover ratio of 2.18x – the lowest in five years - with indirect and direct bidders taking down 67.1% and 17.1%, respectively. 


    Post auction, TIPS breakevens remained under pressure as the auction results left little incentive to scramble for more inflation protection outside of a final bust of demand into the close and as nominals stubbornly continued to rally (~11-18bps).   “The result of the auctions sent breakevens even lower with the 10y touching 229.5bps until risk cleared on the screen and then bounced back for the 4pm close helped by the stock recovery,” one trader explained, as the 10y breakeven currently sits in the screens at 232.125bps (...or roughly -6.25bps lower).


    And against this backdrop, dealers are marking TIPS breakevens roughly 4-9bps lower in the 2y-30y sectors as the curve bear steepened this session with weaker energy prices weighing in in the wings (gasoline -3.87%, Brent -2.67%, WTI -3.44%).


    Lastly, after accounting for the new issue TIPS today (Jul32s) and the TIIJul23s dropping out, among other factors, Barclays preliminary projection for the month-end index duration extension of the 1-30y TIPS index is 0.23y for Series-B and 0.28y for Series-L.


    Heading into the close, the 2y breakeven is going out at 313.25bps (-8.625bps), 5y at 259bps(-8.75bps), 10y at 232.125bps (-6.25bps) and 30y at 217.25bps (-4.25bps).



    Barclays: NSA CPI profile revised higher

    Barclays has revised its 2022-23 NSA CPI profile higher due in part to the stronger-than-expected June print last week and an upward revision to its front-month core CPI forecasts.  The bank now expects headline inflation to end the year up 6.1% y/y in December, before settling lower at 2.6% in end-2023.  Barclays highlights the following key points/forecasts:


    • There was a broad-based acceleration in inflation pressures yet again in June, across both the headline and core levels. At 9.1% y/y, headline inflation reached a new multidecade record in June.


    • We expect core services inflation to maintain firm momentum through 2022, led by firm shelter inflation. The uptick in rent and OER inflation in June suggests that prints for the next couple months could be elevated given how sticky this category tends to be.


    • The unwind in core goods prices has proven elusive so far, but we expect this to materialize in early Q3. We think factors such as a broad-based slowing in consumer demand as tighter financial conditions take hold, improving supply amid inventory restocking by firms, and easing supply constraints should eventually help relieve price pressures in goods.


    • It is uncertain if inflation has peaked. While our baseline forecast suggests that June was perhaps the new peak in the current inflation cycle, there is a lot of uncertainty around the future trajectory of food and energy prices. That said, we expect headline CPI to eventually move lower, to 6.1% y/y by December 2022 and 2.6% by December 2023, aided in part by base effects.


    • We revised higher our core CPI path, reflecting more near-term persistence in shelter inflation. We now expect core CPI to end the year up 5.3% y/y (+0.6pp), and shift lower to 2.9% y/y (+0.1pp) by December 2023.


    • Our NSA CPI profile has been revised higher, by an average of 1.0pt over 2022-23. The revision was mainly driven by the stronger-than-expected June NSA print, and an upward revision to our front-month core CPI forecasts.



    HSBC: Favor steepening opportunities for the yield curve

    Strategists at HSBC have “a neutral view on longer maturity breakevens given their recent narrowing, but see some room for breakevens to widen for shorter maturities” based on their September forwards analysis. In turn, the bank favors “steepening opportunities for the nominal and real yield curve.”  HSBC expounds on this view below:


      ”A flat to inverted yield curve reflects a hawkish Fed outlook. Much is priced into the current nominal and real yield curves’ slopes. In the longer run, the Fed should turn dovish and the curve steepen. Thus, we see an inverted curve view as a ‘greater fool’ trade in the longer run. Fundamentals don’t support the view over time, so those in it must hope for a future buyer at uneconomic levels if they are to get out at a profit.”