BMO Opinion on Tsy $15B 10Y TIPS Auction Reopen

BMO analyst Pro/Con opinions on this afternoon's 10Y TIPS auction re-open:

• Pros: Growing concern around the inflation outlook at the household level over the medium/long-term holds the potential to elicit a stronger bid for TIPS after the University of Michigan Sentiment survey’s 5-10 year inflation expectations gauge unexpectedly ticked up by 0.2 pp this month to the highest level since 2011.
• Only one of the five 10-year real rates auctions tail in 2023 (September by 0.9 bp) but even that offering saw strong bidding stats and rates went into the auction at the intraday highs.
• BMO posits there is a solid fundamental case for locking in rates at current levels given that skepticism has grown in the FOMC’s desire and willingness to execute another rate hike during this cycle.
• Cons: October’s inflation update added to the collective confidence the FOMC will be able to contain higher consumer prices over the longer term which is bearish for inflation protection which may have diminished the inherent value of inflation protection at this stage in the cycle.
• Market-based measures of inflation expectations have remained well anchored with 10-year breakevens having compressed more than 10 bp this month.
• Powell & Co. remain firmly committed to restoring 2% inflation and the potential for more hawkish Fed messaging and the December SEP to push back against rate cuts in early 2024 may lead to a less aggressive bid this afternoon.