USDi: TIIFeb53 re-opening almost sticks the landing

Soft landing swan 13 Jun 2022
Today’s $8bn 30y TIPS re-opening tailed 2bps but otherwise had decent stats. But BEs couldn’t look past the tail and are ending modestly lower.

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  • TIIFeb53 re-opening almost sticks the landing

  • JP Morgan: Forwards breakevens remain too high


Click here for SDR inflation swap trade


TIIFeb53 re-opening almost sticks the landing

The highest real yield level for a 30y TIPS auction in over a decade paved the way for a pretty – but not perfect – landing for today’s $8bn TIIFeb53 re-opening. 


To be sure, the auction tailed 2bps to draw a stop-out yield of 1.97% and a 2.42x bid-to-cover.  However, the tailed masked some pretty solid end-user demand that saw indirects and direct bidders take down 76.2% and 19.6% of the issue, respectively - leaving dealers with another record low allocation of a measly 4.3%.


However, despite the solid demand, TIPS breakevens couldn’t look past the 2bps tail today, with the entire breakeven curve gapping lower once the auction results hit the tape – relinquishing pre-auction gains.  And in the end of day trade, breakevens are up to 1.625bps lower in the 2y-30y sector against the backdrop of a bear steepening move in nominals (~ 2-4bps), lower equity prices (Dow -1.08%, S&P -1.21%, Nasdaq -1.87%), and narrowly mixed energy prices (gasoline +0.14%, Brent -0.02%, WTI -0.01%).


In all, one dealer judged that today’s auction provided “no fireworks” but that the record low dealer take-down showed some “some low conviction” on their part.  “Breakevens traded around until the auction with not much volumes going through for an auction day, and this tail provided some breakeven correction after the over-performance from the past 2 days,” he explained.


Flow-wise in derivatives-space, only a scant amount swap trades on the SDR surfaced, including 10y ZC swaps at 264bps and 264.5bps (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).


Lastly, after accounting for the new issue TIIFeb53s, Barclays’ preliminary projection for the month-end 1-30y TIPS index duration extension is 0.07y for Series-B and 0.10y for Series-L.


Heading into the final hour of trade, the 2y breakeven is going out at 202.5bps (-0.25bp), 5y at 226.625bps (-1.625bps), 10y at 233.25bps (-1.375bps) and 30y at 233.25bps (-1.25bps).



JP Morgan: Forwards breakevens remain too high

Strategists at JP Morgan find that 5Y5Y breakevens derived from their par curves have risen nearly 15bps over the past month to 237bp, trading near the highest levels of recent years outside of the outbreak of the Russia-Ukraine war in early 2022 and the UK LDI episode last fall. Addtionally, the bank finds that 5Y5Y inflation swaps are also hovering near multi-year highs, although they have declined from their local peak above 270bps nearly two weeks ago.   Below JP Morgan looks into what could be contributing to this richening in longer-run forwards and shares why it thinks the richening has run its course:


    …It’s tempting to at least partially attribute the move to the monetary policy backdrop—the Fed is likely done hiking rates even as growth data have continued to surprise to the upside, and Fed leadership including Chair Powell and NY Fed President Williams have openly discussed cutting interest rates in recent weeks, both referring to rate cuts as policy ‘normalization.’ Recall that at the last FOMC press conference, Powell stated, ‘if we see inflation coming down credibly, sustainably, then we don’t need to be at a restrictive level anymore.’ Williams took this further in comments last week when he stated, ‘assuming inflation continues to come down… then if we don’t cut interest rates at some point next year then real interest rates will go up, and up, and up.’


    “…However, to the extent that perceptions of Fed dovishness may have contributed to higher longer-run breakevens, we think the move has run its course for a few reasons. First, while our forecast remains for the Fed to be on hold through the middle of 2024, we continue to think the risk is that the Fed may have to hike further. The minutes released this week reiterate this point, as ‘most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.’ Second, in contrast to Williams’ statement, we reject drawing a mechanical link between realized inflation and real policy rates, as central banks will gauge their stances through signals from interest-sensitive activity, financial conditions, and measures of inflation expectations. At present, these indicators do not suggest disinflation is set to generate more restrictive stances. Third, consistent with these themes, OIS rates have only continued to take out rate cuts for next year, with the forward OIS curve now the least inverted since March.”