J.P.Morgan Believe 5-Year TIPS Supply Needs Further Concession

J.P.Morgan note that Thursday will see “Treasury auction $18bn reopened 5-Year TIPS, $1bn larger than the last reopening auction. Since the April auction, 5-Year real yields have risen 39bp, adjusted for carry over the period, although they are 27bp below their local peak reached last week. Meanwhile, breakevens have narrowed 53bp and are trading near the middle of their YTD range. Relative to our fair value model, 5-Year breakevens appear substantially cheap. From a technical perspective, 5-year TIPS offer attractive carry, given the strong May CPI print. However, other factors are less supportive. TIPS market liquidity remains impaired, and TIPS-focused ETFs have recorded outflows over the past week, in the wake of the Fed’s 75bp rate hike. Overall, despite attractive valuations, given the recent risk-off tone and impaired liquidity, we expect tomorrow’s auction to require a further concession to be digested smoothly.”