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10y TIPS bought, but not ripped off the shelves; BEs sink into close
While today’s $15bn 10y TIPS reopening (TIIJan33s) weren’t ripped off the Treasury’s shelves, the Fed’s ‘pseudo-pivot’ yesterday in the face of still elevated inflation paved the way for a decent enough reception this afternoon.
To be sure, the auction essentially stopped close enough to the screws, drawing a stop-out yield of 1.182% (versus 1.18% WI pre-auction) and drew a bid-to-cover of 2.28x (versus an average of 2.4x for the previous 5 auctions). Indirect bidders took down 73.1% of the issue while directs took down 16%, making dealers step up to the plate for an 10.9% allocation (versus a record low of 7.6% at the January auction).
In all, today’s auction cleared with a pretty average set of results with TIPS breakevens little changed in the immediate follow with shorter tenors offered (…along with softer energy prices – gasoline -0.11%, Brent -1.77%, WTI -2.21%) and longer tenors better bid against more steepening in the nominal curve.
But as risk sentiment steadily soured intraday but still ended higher (Dow +0.23%, S&P +0.3%, Nasdaq +1.01%) and nominals grinded bullishly steeper (~up to 16bps), breakevens fell across the curve with the 10y breakevens falling from a pre-auction high of 231.5bps down to 224.75bps by the close – or roughly 0.25bps lower on the day.
“Breakevens started the day off strong, held onto most of the gains into the $15bn 10y supply, but then collapsed egregiously in the aftermath as duration rallied and risk assets reversed course,” one dealer explained. “The auction itself came precisely on the screws - which while obviously rare - did indicate that real yield buyers were not swayed by the pace of the recent rally,” he continued.
In derivatives-space, inflation swap on the SDR today included 1y ZC swaps at 271bps, 273bps, 272bps and 271.75bps, 2y ZC swaps at 251.625bps, and 251bps, 3y ZC swap at 250.5bps, 250.25bps and 244.4bps, 5y ZC swaps at 253.25bps, 10y ZC swaps at 254.5bps and 254.8756bps, 20y ZC swaps at 253.625bps, and 30y ZC swap at 240.625bps (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).
Heading into the final hour of trade, the 2y breakeven in the screens is at 261.125bps (-14.25bps), 5y at 234bps (-1.25bps), 10y at 224.75bps (-0.125bps) and 30y at 222.375bps (+0.125bps).
Citi: Strong near-term inflation likely unaffected by financial stability concerns
Inflation data last week took a backseat to financial stability concerns amidst substantial market volatility, but “will remain a focus for the Fed,” in the view of strategists at Citigroup. However, the bank believes that “near-term inflation data is unlikely to be impacted by recent developments, with a tightening of credit conditions only weighing on growth and inflation with a lag.”
Core CPI in February was very close to the bank’s forecast, although notably “with details that suggest even further upside risks over the coming months.” And a few factors led to a slight upward revision to Citigroup’s inflation forecasts, with core CPI ending the year at 4.0% YoY and core PCE still at 4.3%. Factors influencing the bank’s inflation assessment last week included:
- ”… (↑) February core CPI at 0.452%MoM was close to our expectation, but a few details of the report were stronger than we had expected and suggest that strength will continue in the coming months.
First, used car prices declined substantially in February, contrary to our expectations for a moderate increase. This led us to simply shift the rise in used car prices to start in March with further upside over the coming months as retail prices rise following the increase in wholesale prices. The Manheim used car price index also increased again in the first half of March by 1.8%, further reaffirming that retail price increases are likely. Of course, there is always the possibility that wholesale price increases are not passed on to retail prices if demand unexpectedly falls, potentially if access to auto lending quickly contracts. We will be watching some high frequency tracking of retail used car prices to gauge the trend of prices over the coming weeks. Tightening of credit conditions would weigh on growth and inflation eventually, but this is unlikely to be a near-term impact.
Second, persistent strength in shelter prices, with stronger increases in rents and OER in February CPI than we had penciled in, led us to again upgrade our path for shelter over the coming months. We still pencil in a slowing in shelter prices over this year, but with more near-term strength relative to our previous forecasts. We expect most forecasts over the coming months will incorporate a slowing in shelter prices, which suggests the potential for a number of upside surprises to core CPI.
“…(↔) Average hourly earnings were softer than expected in February, but we were skeptical that this reflected a loosening in the labor market as opposed to compositional issues as higher paid jobs were lost and lower paying jobs gained. The release of the Atlanta Fed Wage Tracker for February, which controls for compositional issues, helped confirm this. Our preferred weighted overall 3-month measure rose from 5.9% to 6.1%. Atlanta Fed wages should correspond more closely with the Fed’s preferred employment cost index. Continued underlying strength in wage growth keeps upward pressure on core non-shelter services prices.
“…(↓) Softer PPI data in February, particularly a drop in airfares and portfolio management fees, led us to forecast a 0.31%MoM increase in core PCE in February. While still a solid pace implying that year-on-year core PCE remains well within the recent 4.5-5% range, this was softer than the increase we had previously been penciling in. While this mechanically lowers our core PCE forecast, the upward revisions to later months leaves year-on-year core PCE at year end unchanged at 4.3%.”