J.P.Morgan Expect 10-Year TIPS Supply To Go Relatively Smoothly

Ahead of Thursday’s 10-Year TIPS supply J.P.Morgan note that “since the last auction, 10-Year real yields have roundtripped, rising as much as 42bp through the beginning of this month before more than retracing the move over the last two weeks and are now modestly below the last auction stop. Meanwhile, breakevens have also traversed a 40bp range and are now trading 11bp wider since the last auction. Despite the richening in TIPS over recent sessions, breakevens still appear somewhat cheap on a cross-market basis, after adjusting for commodities prices and risk assets, and real yields also flag as somewhat too high versus fundamentals.”

• “Additionally, there are number of fundamental tailwinds that should support the product into the supply process.”
• “First, even as recent economic data have been strong, with core CPI rising 0.5% m/m in February, Chair Powell delivered a dovish hike, signaling the end of the tightening cycle is near.”
• “Second, it appears that concerns over banking sector stability could be subsiding. Chair Powell noted that deposits in the banking system have stabilized over the past week and also stated that “depositors should assume their deposits are safe.” Treasury Secretary Yellen delivered a similar message in her Congressional testimony.”
• “Overall, given cheap valuations and the reduction in Fed tightening expectations alongside still elevated inflation, we think the auction will be digested relatively smoothly.”