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BEs wallow as beta breaks down; 10y TIPS re-opening announced
News that a consortium of U.S. banks was in talks to save ailing First Republic Bank – whose stocks was down 37% at one point this morning - from imminent demise quickly changed the tune markets initially swayed to this session. To be sure, the potential arrival of a white knight buoyed First Republic’s share price – last up 10% - as well as the broader risk tone today as investor scrambled back into risky assets (Dow +1.17% S&P +1.76%, Nasdaq +2.48%).
Against this backdrop, nominals got hit with underperforming front-end yields clocked up to 28bps higher today while long-end yields ratcheted a more modest 6bps higher. However, those looking for any morsels of beta (to nominals) and/or improved risk sentiment to lift the inflation market today were sadly disappointed. Indeed, another choppy, volatile and illiquid trading session is seeing the TIPS breakeven curve mostly lower as the curve bear-flattened today.
In all, one dealer defined the session as “another wildly volatile day in the TIPS market” with the net result defined by “huge moves higher in real yields and massive underperformance versus conventional beta.” Flow-wise, he explained that “the net flows remained better sellers” and he felt that “an unhealthy market in normal times is being exposed again in crisis.”
In derivatives-space, inflation swap on the SDR today included 1y ZC swaps at 253bps, 2y ZC swaps at 234.5bps, 238bps, 237bps, 237.5bps, 238bps and 240bps, 5y ZC swaps at 249.125bps, 247.5bps 246.75bps and 244bps, and 10y ZC swaps at 238.375bps, 239.5bps, 251.125bps and 249bps (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).
Lastly, Treasury formally announced this month’s 10y TIPS reopening of the TIIJan33s next Thursday (March 23rd) for $15bn. However, given uncertainty, especially about the banking sector and the Fed’s next move, assessing auction demand will be a “game time decision”, in the view of strategists at Barclays. Nevertheless, Barclays provides an early read below:
- ”…The dynamics of next week’s 10y TIPS reopening are emblematic of the cross-currents buffeting the US rates market. On the one hand, ongoing strong inflation and tight labor markets are keeping pressure on the Fed to keep real rates in restrictive territory. On the other hand, the past few days have been some of the most volatile on record in the Treasury market, leading to broad-based concerns about financial stability, potentially catalyzing an earlier-than-expected cessation of the Fed’s hiking cycle. Although 10y real yields have rallied c.40bp since the middle of last week, they still sit well north of 1%, with 5y5y at 1.15%, offering potential value in a world where most estimates of neutral real rates remain at 0-50bp, especially if recession concerns accelerate in the coming weeks. In essence, demand next week may be a litmus test of whether investors expect the Fed to maintain its recent rate hikes or to capitulate despite real economic strength.”
Barclays estimates that “fair value for the roll at announcement will be 2.4bp because of carry from announcement until auction settlement.” And after accounting for the reopening, the bank’s “preliminary projection for the month-end index duration extension of the 1-30y TIPS index is 0.02 years for Series-B and 0.03 years for Series-L.”
Heading into the final hour of trade, the 2y breakeven is trading in the screens at 272bps (+3bps), 5y at 233.375bps (-5.25bps), 10y at 221.5bps (-6.125bps) and 30y at 220.875bps (-4.5bps).