USDi: BEs relatively contained heading into 5y TIPS auction

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BEs relatively contained heading into 5y TIPS auction

Strong whiffs of sticky and stubbornly high inflation in the UK – a whopping 10.1% YoY, though down marginally from the multi-decade high of 11.1% hit in October – was the biggest theme this trading session (see Total Derivatives).   Indeed, USTs took a sympathy hit for Gilts across the pond today with nominals yields bear-flattening to the tune of up to 7bps today.

However, TIPS never ventured too far off the intraday path of their nominal brethren today, with breakevens chopping along in the narrow but contained range – ending the session narrowly mixed (~ +/- 1bps) beyond the 2y tenor which has remained the point of interest on the curve for the past few sessions.  In the backdrop, equities meandered about to once again end within spitting distance of yesterday’s closes (Dow -0.23%, S&P -0.1%, Nasdaq +0.03%) while the energy complex softened up again (gasoline -3.97%, Brent -2.19%, WTI -2.31%).

In derivatives-space, some of the chunkier tickets printed in inflation swaps on the SDR today included $100m 1y ZC swaps at 252.5bps, $170m 3y ZC swaps at 248.875bps, $100m 5y ZC swaps at 255.375bps, a total of $142m ($50m and $92m lots) 8y ZC swaps at 257.5bps, and a total of $150m ($25m, $50m and $75m lots) 10y ZC swaps at 255.875bps (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).

Lastly, today’s Beige Book release showed that the Fed’s rate hikes are slowing the economy but only having a mo9dest impact on reigning in inflation.  “Overall economic activity was little changed in recent weeks,” the Fed said today in the report. “Overall price levels rose moderately during this reporting period, though the rate of price increases appeared to be slowing,” the Beige Book said.

Heading into the final hour of trade, the 2y breakeven is going out at 255bps (+1.75bps), 5y at 241.625bps (unch), 10y at 229.125bps (-0.125bps) and 30y at 226.75bps (unch).

Barclays: 5y TIPS auction preview

Heading into the auction, strategists at Barclays see two-sided risks to the auction, despite a pattern of stop-throughs, as coverage ratios have declined alongside growing auction sizes while real yields have richened.  Barclays expounds on its auction preview below:

"Despite the size growth in recent years, demand at 5y TIPS auctions has generally remained strong, with only two tails since 2019. That said, the bid-to-cover of last October’s new issue auction, of 2.38, was the lowest since 2016, as an early indication that growing auction sizes, coupled with ongoing Fed QT and a nascent potential slowing in inflationary pressure, could be stretching demand tolerance. We estimate that fair value for the roll at announcement will be 5.9bp, and see two-sided risks to the auction with no strong bias as to whether another stop-through is likely this month.

 

“…After accounting for the reopening and the TIIApr24s rolling out of the basket, our preliminary projection for the month-end index duration extension of the 1-30y TIPS index is 0.11 years for Series-B and 0.09 years for Series-L. The extension is smaller than last April, largely because the outstanding of the TIIApr24s is notably less than the TIIApr23s, and thus has a smaller impact when rolling out of the basket. We also project the 0-5y TIPS index to extend 0.12 years for Series-B and 0.11 years for Series-L due to the combination of the the high-coupon TIIApr28s rolling into the basket, and the issuance of the new low-coupon TIIApr28s."

 

“…From a macro lens, 5y real yields have rallied in recent months as the market has priced in Fed cuts, and now sit near the low-end of the wide 1.0-2.0% range dating back to mid-September. The market is still priced for real yields to remain either in neutral or restrictive territory out to 10y, abstracting away from real term premia, though with concerns about a recession on the horizon, we see potential space for real yields to richen further in an economic downturn, though it is not obvious that TIPS would outperform nominals in that context. While there may have been preliminary signs of slowing inflationary pressure in the March 23 CPI release (shelter softened to 0.56% m/m, lowest since April 2022, and job openings have declined to the lowest level since April 2021 — a possible early signal of a loosening of the labor market), core inflation was a still-elevated 0.4% m/m, and the Atlanta Fed’s 1m and 3m annualized measures of core sticky CPI are at 4.7% and 5.9%, respectively.”