J.P. Morgan: 10-Year TIPS Auction May Require Some Concession

J.P. Morgan note that "Treasury will auction $12bn reopened 10-year TIPS, unchanged in size from the last reopening auction. The last 10-year auction in July cleared 1.5bp cheap to pre-auction levels, despite a rebound in end-user demand to 82.2%. Auction allotment data show that the rise in demand was driven by investment managers, who took down 72.3% of the auction, while foreign demand declined to 9.4%. The July auction cleared at the lowest 10-year auction yield on record, and real yields have since declined 7bp, but have largely stabilized following the aggressive rally observed over the prior two months. Nonetheless, TIPS have continued to outperform versus nominals, and 10-year breakevens have widened 23bp since the last auction, though they are sitting 10bp off their post-virus wides observed just after Jackson Hole. At current levels, 10-year breakevens appear more than 25bp wide relative to nominal yields, changes in oil prices, high-grade credit spreads, and our trade-weighted dollar index, more than twice the standard error of our model. The flattening in the breakeven curve observed through the early part of the summer has moderated over the last couple of months and the 10-year sector appears fairly valued versus the wings after adjusting for the level of breakevens and the shape of the nominal curve. Overall, with breakevens broadly rich to their drivers and curve valuations appearing fair, we think tomorrow's auction may require some concession from current levels in order to underwrite smoothly."