USDi: Front-end BEs ebb and flow into the black; 30y TIPS announced

Liquidity 17 Oct 2022
Seemingly bulletproof front-end BEs managed to ebb-and-flow their way modestly into the black despite soured risk sentiment and lower energy.

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  • Front-end BEs ebb and flow into the black; 30y TIPS announced

  • JP Morgan: 10y TIPS breakeven technicals


    Click here for SDR inflation swap trade


    Front-end BEs ebb and flow into the black; 30y TIPS announced

    Despite some bouts of intraday selling on strength, the U.S. inflation market managed to ebb-and-flow its way into the black today – at least at the seemingly bulletproof front-end and only modestly at that.


    To be sure, despite another souring in risk sentiment (Dow -0.73%, S&P -0.88%, Nasdaq -1.02%) and a pull-back in energy prices this session (gasoline -0.99%, Brent -1.14%, WTI -1.06%), TIPS breakevens made a rather circuitous journey intraday that left at least the very short tenors a smidgen higher – with an added beta assist in the afternoon from a 7-9bps rise in nominals yields after today’s sloppy 30y bond auction. 


    “Very short term breakevens stayed on the bid side all day and next week's January fixing print closed up at 298.55, and Jul23s were again the best performer of the day,” one trader relayed. 


    Flow-wise, in derivatives-space, inflation swap trades on the SDR today included 1y ZC swaps at 256bps ($250m), 260bps and 261bps, 5y ZC swaps at 253.625bps, 254.875bps, 255.375bps and 255bps, 10y ZC swaps at 254.625bps, and 30y ZC swaps at 241.75bps  (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).


    Lastly, Treasury announced that it will auction off $9bn new-issue 30y TIPS next Thursday (Feb. 16th).  Strategists at Barclays “view fair value for the roll at announcement as +4.3bp, driven by -1.3bp for net carry, +7.0bp for the yield curve, -1.3bp for the liquidity premium, and -0.1bp for the floor value differential.”  The bank finds that “the yield curve factor is especially nuanced this year, due to the expected large increase in the coupon versus the TIIFeb52s shortening the new issue’s duration.” And looking ahead Barclays sees “fair value for the roll at settlement, which excludes the carry factor between announcement and auction settlement, as +5.6bp.”


    Heading into the final hour of trade, the 2y breakeven is going out at 263.25bps (+0.25bps), 5y at 249.25bps (-0.75bps), 10y at 232.875bps (-2.75bps) and 30y at 229.75bps (-0.75bps).



    JP Morgan: 10y TIPS breakeven technicals

    Looking at the 10y TIPS breakeven through a technical/chartist lens, strategists at JP Morgan see the next major line in the sand at the 241-244bps resistance level (currently trading at 232.875bps).  JP Morgan expounds on its technical analysis below:


      ”…The 10-year TIPS breakevens bounce from near key support at the 217.5bp Sep 28 low and 213.5bp Dec 16 low is now pressing through short-term resistance at 225-230bp. Parameters there include the upper end of the 4Q22 trend channel, 50-day MA, and Dec highs. We continue to think the late-2022 lows will define the lower bounds of a first quarter trading range and would view sustained closes above resistance to bolster the view and setup. To the upside, next resistance sits at the 241-244bp short-term inflection. Through there, the early-Oct widening reversed at the 258-259bp resistance layer. From a technical perspective, we think resistance there, including the 259.5bp Apr 50% retrace, and 264bp Aug 24 wide will continue to define the upper end of a range for breakevens in the early months of the year. Secondary resistance rests at the 270bp Apr 61.8% retrace and then the 280-282bp Mar-Apr top pattern breakdown. Alternatively, to the downside, additional support is layered at the 209bp Mar 2020 38.2% retrace, 189.5bp Sep 2020 78.6% retrace, 175-177bp Nov 2020 breakout zone and Mar 2020 50% retrace, and then longer-term parameters at the 150.5-155bp 2021-2022 pattern measured move objective. We think we would need to see an increased risk of recession dynamics for those lower levels to be achieved.”