J.P.Morgan Expect Relatively Smooth 10-Year TIPS Supply

J.P.Morgan note that Thursday will see Treasury “auction $14bn reopened 10-Year TIPS, unchanged in size from the last reopening auction in November. Since the January auction, 10-Year real yields have traded in a nearly 70bp range, falling sharply in the weeks following Russia’s invasion of Ukraine, before retracing much of the move, and are now 20bp below the last auction stop, adjusted for carry over the period. Meanwhile, breakevens have widened 65bp to all-time wides. At current levels, 10-Year breakevens appear only modestly rich relative to our fair value framework, with the residual on the model now well within the standard error. The front end of the curve has outperformed sharply, with the 5s/10s breakeven curve about 35bp flatter since the last auction, but notably, 5Y5Y forwards have also risen nearly 30bp, trading near their highest levels since August 2014. Breakevens have been resilient to an increasingly hawkish Fed, as renewed supply chain constraints arising from geopolitical developments and China’s zero-tolerance COVID policy, coupled with the broadening out of inflationary pressures within the consumer basket, add significant risk that inflation settles above 3%. Against this backdrop, demand for inflation protection appears strong: in contrast to late January, when the poorly received TIPS auction occurred against a backdrop of heavy outflows from TIPS-focused funds, the 4-week average of inflows has risen back to the highest level since early December. Thus, even with breakevens at all-time wides, we think tomorrow’s auction will be relatively smooth.”