USDi: Strong opening for BEs quickly fizzles out

Air bubble 21 Jun 2021
A strong opening for BEs which built on yesterday’s gains quickly fizzled out as better sellers seize on the early strength.

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  • Strong opening for BEs quickly fizzles out

  • Citigroup: TIPS demand at multi-year highs


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Strong opening for BEs quickly fizzles out

A strong opening in USD inflation that extended a move that kicked off yesterday was abruptly cut short in the early trade today.   To be sure, TIPS breakevens opened up better bid this morning but better sellers gained the upper hand mid-morning, putting breakevens in retreat mode for the rest of the day.  And with the session coming to close, breakevens beyond the very front-end are being marked a little lower (~0.5-1.375bps).


“Yesterday's strong bid tone continued anew from the start this morning, accelerating into an aggressive short squeeze situation in a hurry and taking 10y breakevens up to a high print of 244bps before sanity  arrived,” one dealer explained.   “The reversal was equally swift and while there were a few further attempts to push higher the rest of the day was shaded with a bearish tone as the buyers retreated back to the shadows,” he continued


The move came against the backdrop of a steadily dissipating sell-off in nominals (~0.5-2bps by the close) amid some better-than-expected data (i.e. FHFA and S&P CoreLogic CS 20-City measures of house prices, Conference Board consumer confidence), higher equity valuations (Dow +0.08%, S&P +0.28%, Nasdaq +061%), and mixed energy prices (gasoline -1.30%, Brent +1%, WTI +1.08%).


Flow-wise in derivatives-space, swap trades on the SDR today included 1y ZC swaps at 236.25bps, 236bps and 235.75bps, 2y ZC swap at 241.5bps and 241.875bps, 3y ZC swap at 246.625bps,  5y ZC swaps at 260.252bps, 261bps, 259.5bps, 257.375bps, 257.875bps and 257.625bps,  7y ZC swap at 263.5bps, 8y ZC swap at 263.125bps, 10y ZC swaps at 264.5bps, 264.375bps, and 263.875bps, 15y ZC swaps at 263.5bps, 20y ZC swaps at 260bps (likely 15y x20y switches), and 30y ZC swaps at 254.125bps (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).


Looking ahead, the market’s focus this week is likely to be on Wednesday’s FOMC meeting – with a 25bp hike widely expected with Barclays looking for its tightening bias to be maintained – and then the PCE report on Friday (Bloomberg consensus 0.2% MoM/4.2% YoY); Barclays economists expect core inflation to have moderated 15bp, to 0.16% m/m (4.1% y/y).


Winding down today’s trade, the 2y breakeven is seen in the screens at 200.625bps (unch), 5y at 228.875bps (-1.375bps), 10y at 238.5bps (-1.125bps) and 30y at 231.625bps (-1.375bps).



Citigroup: TIPS demand at multi-year highs

Strategists at Citigroup were expecting a strong 10y TIPS auction last week, but the demand far exceeded their expectations. As a result, the bank thinks that IOTA spreads will continue to tighten as investor demand for TIPS likely persists over the next few months. Moreover, the bank believes that Treasury will likely increase TIPS auction sizes starting in October.  Citigroup elaborates below:


    ”…In our last weekly, we highlighted that we are seeing extremely strong demand for long end TIPS and that the 10y new-issue auction this week would likely perform well. As we expected, the new-issue 10y auction (last) Thursday, traded through the when-issued yield by 5.1bp. This is the strongest 10y TIPS auction in terms of tail/through since the 10y TIPS reopening auction in April of 2010.


    “…In terms of dealer takedown, at 1.5% of the total offered amount, this is the lowest dealer takedown for any TIPS auction (including 5y and 30y TIPS auctions) since 2005. More striking is the fact that the second lowest dealer takedown was during the 5y TIPS auction from last month at 3.7%. So, we have had two consecutive auctions of all-time high demand from foreigners and investment funds. While we do not have the data on takedown percentages for (last) week’s 10y auction yet, investment funds purchased 87% of the offered amount during the May 10y TIPS reopening auction and 86% in the 5y TIPS auction last month. That was the highest percentage of investor fund takedown since 2005 (that is as far back as our data goes), not just at TIPS auctions but across any treasury auctions.


    “…Historically, strong TIPS auctions haven’t been good signals for a rally in real rates. Real rates have actually sold-off in the two-week period after each of the last three 10y TIPS auctions that traded through the when-issued level. However, TIPS IOTA spreads tend to tighten on average after strong TIPS auctions and 10y IOTA spreads at close to 23bp look wide compared to 5y and 30y IOTA spreads at 12bp and 19bp, respectively. (Looking at) time series of 5y and 10y TIPS IOTA spreads between the last hike and the first cut during the 2016-2018 hiking cycle (we find that) IOTA spreads have not bottomed until much closer to the first cut in 2019 and we expect that would be the case once again in this cycle. Investors will likely continue to prefer TIPS over nominals until the tail-risk of sustained higher inflation gets completely priced out.


    “…This strong demand for TIPS will most likely encourage the Treasury to increase the size of future TIPS offerings. We expect 5y and 10y TIPS auction sizes to increase by $1bn starting with the new-issue 5y auction in October.”