USDi: BEs winning streak continues post-FOMC; 10y TIPS supply up next

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BEs winning streak continues post-FOMC; 10y TIPS supply up next

Fed officials had the difficult – and opposing – choice of either (1) stemming off inflation or (2) stemming off financial turmoil.  And it seems like they chose the latter today.  

To be sure, the Fed raised rates by the largely expected 25bps but also gave a tacit hint that they may not shoot any more bullets given rising financial/banking sector angst.  “The committee anticipates that some additional policy firming may be appropriate,” the statement said.  And the Fed dropped a phrase used in their previous eight statements that said the committee anticipated “ongoing increases” in rates would be appropriate. 

As for the banking stress, the Fed said that “recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain.” And in the Q&A, Fed Chair Powell noted that tighter credit conditions can substitute further hikes

And with a seemingly less hawkish Fed at the table now, nominals yields slid sharply lower today (~8-24bps) in a front-end-led move.   However, TIPS flexed their muscles and outpaced their nominal counterparts in all tenors today, leaving breakevens another 2-4bps higher in the 2y-30y sector as this week’s winning streak continued.

“Breakevens continued their furious rebound from Friday's low point for most of the morning before giving a bit back as we awaited the FOMC, and now due to some late-day selling have erased the post-Feb bump,” one dealer explained.  “The real yield moves were still impressive across the curve,  and sets up an interesting dynamic ahead of 10y supply tomorrow (see below),” he continued. 

In derivatives-space, inflation swap on the SDR today included 1y ZC swaps at 273bps and 275bps, 2y ZC swaps at 253bps and 254.75bps, 3y ZC swaps at 247bps, 5y ZC swaps at 250.375bps, and 252.875bps, 8y ZC swaps at 251.875bps, 10y ZC swaps at 251.25bps, 253bps and 253.25bps, 20y ZC swaps at 243bps, and 30y ZC swaps at 238.375bps, and 239.25bps (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).

Ahead, inflationistas will turn their attention to tomorrow’s $15bn 10y TIPS re-opening (TIIJan33s).  Heading into tomorrow’s supply, strategists at SocGen are “positive (overall) on the auction, as the 10y real yield of above 1.3% (at time of writing) is likely to continue to draw end-user demand in the context of sticky inflation.”   Similarly, strategists at Barclays see an attractive real yield as an effective lure for investors but they also highlight some tail risks

”…. Based on where things sit now (which could change dramatically by next Thursday, given the current hyper-volatile environment), we think another strong 10y TIPS auction is more likely as investors take advantage of still-elevated real yields in an uncertain macroeconomic regime. This is supported by the lack of a meaningful or obvious deterioration in TIPS market liquidity, as indicated by iotas and spreads to our real spline curve, especially in the 5-10y sector.

 

“…Tail risks to the auction are clear. Even though aggregate auction demand in January was strong, primary dealers took down an all-time low of 7.6%, leaving the process increasingly dependent on buy-side support. TIPS funds have experienced generally consistent outflows in recent months, and even though we anticipate some seasonal inflows, they will likely be more concentrated in short-tenor TIPS. In addition, although the auction will occur the day after the March FOMC meeting, WI trading will open the prior Thursday, with that major risk event looming in the following days.”

Heading into the final hour of trade, the 2y breakeven is at 278.5bps (+3.25bps), 5y at 237.5bps (+4.125bps), 10y at 226.625bps (+2.5bps) and 30y at 223.875bps (+2.5bps)