USDi: BEs get a modest bounce as sentiment improves; Month-end eyed

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BEs get a modest bounce as sentiment improves; Month-end eyed

An inexplicable rebound in First Republic Bank shares – up roughly 9% today – and positive upward momentum from Meta Platforms shares after better than expected earnings released last night paved the way for a solid risk-on day this session. 

Indeed, despite a slew of data showing some sluggishness on the economic front (i.e. GDP, personal consumption, pending home sales, Kansas City Fed) as well as hotter than expected inflation (i.e. PCE +4.9% versus +4.7% Bloomberg consensus), all the major domestic equity indices posted solid gains today (Dow +1.57%, S&P +196%, Nasdaq +2.43%).

And the corresponding 6-15bps bear-flattening move in nominals along with some stabilization in oil prices (Brent +0.73%, WTI +0.85%) allowed the U.S. inflation market to bask in the radiant sunshine with TIPS breakevens and inflation swaps gaining – an albeit rather modest -  0.25 to 2bps in the 2y-30y sector as both curves bull-flattened a bit today. 

Looking ahead to TIPS index rebalancing tomorrow, one dealer noted that they’ve seen “a smattering of early month-end activity” but that “the main affected bonds have remained relatively stable within the context of the broader moves.”

Bloomberg’s updated estimates have the Series-L and Series-B TIPS index month-end duration extensions at 0.09yrs and 0.11yrs, respectively.  Also tomorrow, the data focus is likely to be the quarterly ECI reading (+1.1% Bloomberg consensus) which many consider that series the best indicator of wage pressures.

In derivatives-space, inflation swap trades on the SDR today included 1y ZC swaps at 232.5bps, 2y ZC swaps at 235.5bps, 3y ZC swaps at 243.75bps, 5y ZC swaps at 253.75bps, and 253bps, 10y ZC swaps at 255bps and 255.25bps, and 30y ZC swaps at 244.625bps and 244.875bps (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 is going out at 220bps (+2bps), 5y at 230bps (+0.25bps), 10y at 227.625bps (+0.625bps) and 30y at 226.375bps (+1.125bps).

JP Morgan: Relative value opportunities along the TIPS curve

Given the fundamental backdrop in the current environment, strategists at JP Morgan prefer to “remain neutral on breakevens, despite modestly cheap cross-market valuations, and think that risks are balanced over the near term.”  With this in mind, the bank favors looking for relative value opportunities along the TIPS curve, as liquidity allows:

”… . Broadly, the outperformance of the front end (last) week, despite the decline in oil prices and 5-year TIPS supply, was notable, but reverses the curve steepening observed late last week and the curve does not appear significantly mispriced at these levels….5Yx5Y inflation swaps climbed to 4-month highs (the previous)  week, even as  1Yx1Y lingered near the low end of the range, but with (last) week’s reversal flatter, both sectors now appear closer to recent averages. Moreover, the 2s/10s breakeven curve appears fairly valued versus the level of 2-year breakevens and the slope of the nominal yield curve.

 

“…Consistent with the rise in 1Yx1Y swaps, 2-year TIPS outperformed sharply versus surrounding securities over the past week. (Looking at) the forward 1-year breakevens implied by April-maturity TIPS, the sharp widening in the Apr 24/Apr 25-implied forward illustrates the relative richening of Apr-25 TIPS along the curve, and the cheapening of Apr-24 TIPS as they fell out of the index basket. Apr-24 TIPS now offer 10bp more pickup versus nominals on an asset swap basis, compared with Apr-25s, and the latter issue screens as significantly rich versus other front-end securities. While liquidity in very short-maturity TIPS is limited, investors could benefit from rotating into Apr-24 TIPS as they become available.”