J.P.Morgan Expect 5-Year TIPS Supply To Go Relatively Smoothly

J.P.Morgan note that Thursday will see the Treasury auction "$16bn reopened 5-Year TIPS, $1bn larger than the last reopening auction in December. Since the April auction, 5-Year real yields initially declined as much as 36bp through early May but have nearly fully reversed the move over the past month, and are now just 5bp below the most recent auction stop, after adjusting for carry. Alongside this move, 5-Year breakevens have also retreated 25bp from their mid-May wides, despite two stronger-than-expected CPI prints over the interim and a lift in some measures of persistent inflation. Stripping out the high inflation rates of 2021, 1Yx4Y breakevens have fallen to their narrowest levels since late February, when the rollout of vaccines was still in relatively early stages, and are no longer priced for any overshoot of the Fed's inflation target over the coming years. Meanwhile, flows into TIPS-focused ETFs have remained robust, and ex-ante 3-month carry on 5-Year breakevens is near its highest level in nearly a decade. Thus, despite the hawkish outcome of today's FOMC meeting, valuations appear cheap, demand appears robust, and carry remains highly attractive. Overall, we think tomorrow's auction will be digested relatively smoothly."