J.P.Morgan Think 30-Year TIPS Supply Requires Further Concession

J.P.Morgan note that Thursday will see the Treasury auction "$8bn reopened 30-Year TIPS, $1bn larger than the last reopening auction. Since the February auction, 30-Year real yields have declined by 25bp, and remain near all-time lows, though they are trading 8bp above the local trough reached earlier this month. Meanwhile, 30-Year breakevens are about 8bp wider since the February auction and near the middle of their YTD trading range. After adjusting for fundamental drivers including the level of nominal yields, credit spreads, Fed balance sheet, energy prices, and realized sticky core inflation, long-end breakevens appear fairly valued. Along the curve, the long end has underperformed, with the 10s/30s breakeven curve flattening 3bp over the last week and a half adjusted for carry, even as the nominal yield curve is close to unchanged. However, real yields remain too low relative to fundamentals in our view, and if yields trade near current levels into tomorrow's supply process, the auction would price within 1bp of last August's record low auction yield. Overall, even though real yields have risen modestly in recent weeks and the long end has cheapened somewhat along the curve, we think tomorrow's supply will require a further concession from current levels to underwrite smoothly."