J.P.Morgan Look For Smooth Digestion Of 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. Since the March auction, 10-Year real yields have risen by 55bp, adjusted for carry over the period, although they are about 20bp below their local peak reached mid last week. Meanwhile, breakevens remain 38bp wider than levels observed just prior to Russia’s invasion into Ukraine though they have narrowed 24bp, carry-adjusted since the March auction, and 10-Year breakevens now appear roughly 13bp narrow versus our fair value model. Moreover, 10-Year cash breakevens have also cheapened versus inflation swaps, with the swap/breakeven basis widening more than 3bp over the last two weeks. From a technical perspective, TIPS market liquidity remains impaired, and though this dynamic has likely contributed to recent volatility in breakevens, it also suggests investors may use tomorrow’s auction as a liquidity event. Overall, despite the recent weakness in risk assets and evidence that growth momentum may be slowing, given relatively cheap valuations, we think tomorrow’s supply should be digested smoothly.”