J.P.Morgan Expect 10-Year TIPS To Be Digested Relatively Smoothly

J.P.Morgan note that Thursday will see "Treasury auction $13bn reopened 10-year TIPS, $1bn larger than the last reopening auction in November. Since the January auction, 10-year real yields have risen by 31bp, with nearly all of the move occurring over the second half of February, before trading in a range over recent weeks. Meanwhile, breakevens are roughly 22bp wider since the January auction, and alongside the moves in oil prices and nominal yields over the period, this widening has been broadly consistent with our fair value estimates. Along the curve, the front end has continued to outperform in recent weeks, with the 5s/10s breakeven curve now inverted at -33bp, though the breakeven curve steepened modestly in the aftermath of today's FOMC meeting. With the 2023 median dot showing no hikes, and the Committee's messaging remaining dovish, this should continue to be supportive of intermediate breakevens. Importantly, consistent with the FAIT framework, the FOMC will likely be patient in removing accommodation, rather than responding aggressively to building inflation pressures in the next few years, and we think the magnitude of inversion at the front end of the breakeven curve remains mispriced in light of this. Combined with this patient reaction function, the details of last week's CPI report - specifically the firming observed in stickier core inflation components including OER - and the recent passage of the ARP provide a supportive fundamental backdrop for the product. Overall, with intermediate breakevens appearing roughly fairly valued, real yields materially higher over the last two months, and the fundamental backdrop supportive, we think the 10-year supply will be digested relatively smoothly."