USDi: Red carpet rolled out for 5y TIPs reopening despite energy woes

Oil rig 11 Oct 2021
The red carpet was rolled out for today’s $19bn 5y TIPs reopening despite some energy woes. But BEs are ending well offs their post-auction highs.

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  • Red carpet rolled out for 5y TIPs reopening despite energy woes

  • BofA: 30y TIPS trade challenged by macro resilience


    Click here for SDR inflation swap trade


    Red carpet rolled out for 5y TIPs reopening despite energy woes

    While the floor may have fell out from underneath the energy complex today (gasoline -2.69%, Brent -3.90%, WTI –4.32%), that seemingly petty little development did not adversely impact the second coming of the Apr28 TIPS today. 


    To be sure, today’s $19bn 5y TIPS re-opening received the red-carpet treatment from investors seeking inflation protection, stopping a whopping 3.8bps through the 1pm level to draw a stop-out yield of 1.832% and a decent 2.56x bid-to-cover ratio.  Indirect bidders took down a sizeable 85.1% of the issue while directs claimed 11%, leaving dealers with yet another record low allocation of 3.9%.


    Heading into today’s auction, TIPS breakevens – at least beyond the very front-end – were already gaining a bid, but once the auction results hit the tape then entire breakeven curve gapped higher.  And with the curtain falling on today’s trade, breakeven have come well off their post-auction highs as sellers sold the strength, and dealers are marking breakevens down roughly 1bps to up roughly 3bps higher in the 2y-30y sector with the 5y point at the top of the leader board despite energy’s woes this session.


    Flow-wise in derivatives-space, inflation swap trades on the SDR today included 1y ZC swaps at 247bps, 2y ZC swaps at 241.5bps, 3y ZC swaps at 245bps and 243bps, 4y ZC swaps at 250.75bps and 246.25bps, 5y ZC swaps at 248bps, 249bps, 249.875bps, 253.75bps, 253.625bps and 252.375bps, 7y ZC swaps at 251.5bps and 10y ZC swaps at 256.625bps and 255.75bps (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).


    Heading into the late close, the 2y breakeven is going out at 211bps (-0.875bps), 5y at 221bps (+2.875bps), 10y at 223.75bps (+2bps) and 30y at 225.625bps (+1.375bps).



    BofA: 30y TIPS trade challenged by macro resilience

    In their Year Ahead publication, strategist at BofA recommended clients go long 30y TIPS which was underpinned by their US Economics team's view for a recession this year while inflation proved more persistent.   However, the bank finds that the trade has run into some headwinds this year but it still recommends the trade for longer term investors.  BofA elaborates below:


      ”… We saw upside risk to inflation term premium as our economists anticipated an uptick in unemployment over the course of the year driving a pivot from the Fed but inflation still above the Fed's target, making owning real yields attractive. We thought the 30y point was relatively insulated from potential additional Fed hikes and expected outflows from TIPS ETFs concentrated in the front- end and belly of the curve.


      “…A stronger than expected economic backdrop and greater confidence in declining inflation near term have been headwinds to the trade. The 30y real yield at 165bps, not far from where we initiated the trade (160bps), reflects an attractive entry level. We think that fundamental fair value for the 30y point should be anchored on expectations for the neutral rate, which the Fed still sees around 50bps. Even the upper end of the central tendency of the longer run dot at 2.8% suggests much lower longer-term real yields vs market pricing.


      “…A key headwind to being long 30y real rates is wavering conviction in a US recession which could see Fed cut to neutral vs a stimulative policy rate. A more challenged demand backdrop may also be a near-term risk to this trade. However, for longer term investors we think that as the economy cools and conviction in cuts increase, 30y real yields have room to normalize closer to 100-125bps.”