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PPI completes double whammy; BEs push up despite ‘so-so’ 30y auction
Today’s January PPI release completed this week’s double whammy on the inflation front for the collective financial landscape. To be sure, on the heels of Tuesday’s stronger-than-expected January CPI print (see USDi), wholesale prices last month came in at a much hotter-than-expected +0.5% MoM/+6% YoY (versus Bloomberg consensus of +0.4% MoM/+5.4% YoY).
Digging into the details of the PPI data, excluding food, energy, and trade margins, final demand PPI “was up 0.6% m/m (4.5% y/y), the largest monthly move since March 2022” analysts at Barclays highlight. Moreover:
- “…Final demand goods rose 1.2% m/m, led by energy costs, the largest monthly increase since June 2022 Most of the rise in January prices is attributable to a 5.0% increase in energy costs, fueled by gasoline prices (+6.2% m/m). That said, final demand goods PPI excluding food and energy climbed 0.6% m/m, following a tepid 0.1% increase in December, amid broad-based increases across commodities. Final demand food PPI, meanwhile, fell 1.0% m/m.”
However, despite inflation concerns busting at the seams, today’s $9bn 30y TIPS auction wasn’t the prettiest debut for a new TIPS issue. To be sure, the auction tailed roughly 1bps to draw a stop out yield of 1.55% - highest since 2011 - and a rather lukewarm 2.38x bid-to-cover. Nevertheless, the 9.9% primary dealer take down was the lowest on record for a 30y TIPS auction as direct and indirect bidders took 14.1% and 76% of the pie, respectively. And one trader judged that the modest auction tail was “on-the-screws” when “graded on a TIPS-adjusted curve.”
However, with this week’s strong inflation prints still very fresh on the minds of many, today’s auction didn’t put an end to the bullish price action with TIPS breakevens and inflation swaps marked higher (~1-4bps) in the 2y-30y sector once again this session. “Real yield demand likely carried the day and after a late-day selloff it was the 30y breakeven that remained the best performer on the curve,” one trader explained. “Flows generally reflected the broader strength with very few sellers into it and some larger market volumes went through in the very front-end as accounts adjust their near-term CPI risk,” he continued.
Flow-wise, in derivatives-space, inflation swap trades on the SDR today included 1y ZC swaps at 293.75bps (a total of $273m) and 295bps, 3y ZC swaps at 273bps, 274bps (a total of $364m), 3y ZC swaps at 267.75bps, 5y ZC swaps at 263.75bps, 264.375bps, and 264.625bps, 10y ZC swaps at 259.875bps (a total of $190m) and 260.125bps, and 25y ZC swaps at 257.5bps (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).
Lastly, looking ahead to month-end, after accounting for today's new issue TIIFeb53s, Barclays’ preliminary projection for the month-end 1-30y TIPS index duration extension is 0.09y for Series-B and 0.13y for Series-L.
Heading into the final hour of trade, the 2y breakeven is going out at 288.75bps (+1.625bps), 5y at 257.25bps (+1.125bps), 10y at 237.625bps (+3.125bps) and 30y at 235.5bps (+3.75bps).
Barclays: Short the TiiFeb52 iota
With today’s $9bn new-issue 30y TIPS now placed in well-kept hands, strategists at Barclays note that “the offering is notable for a couple of reasons, including a massive jump in the coupon from the current on-the-run 30y (from 0.125% to…1.500%, the largest spike in over a decade), which has the mechanical impact of shortening the issue’s duration. In fact, we calculate that the higher coupon will lower the modified duration of the new TIIFeb53s sufficiently such that on a duration basis, it may be closer to the TIIFeb50s (old-old 30y TIPS) than the TIIFeb52s (on-the-run).
In addition, Barclays notes that “this naturally translates into a smaller required duration extension at month-end. By our tracking, if you exclude months that were impacted by auction schedule changes, this is the largest drop in the duration extension versus 12m prior since July 2016. This could imply less of a needed rebalancing out of the TIIFeb52s, all else equal, with that issue remaining the longest duration TIPS even after the new issuance, which could help sustain a bid for the CUSIP even after it becomes the old 30y.”
Putting this all together, with the iota of current on-the-run TIIFeb52s at the widest level since late August, Barclays recommends “shorting the TIIFeb52 iota to position for the issue to outperform versus CPI swaps. We enter the trade at a matched-maturity CPI swap basis of 13bp, target 5bp, and set a stop loss of 20bp.”