JPM Expect 10-Year TIPS Supply To Be Digested Relatively Smoothly

Ahead of Thursday's 10-Year TIPS auction J.P.Morgan note that "since the March auction, 10-Year real yields have declined by 35bp, after adjusting for carry over the period, although they have backed up 10bp from the local lows reached earlier this week. Meanwhile, the move in real yields has outpaced the decline in nominal yields, and breakevens have widened 26p, reaching new local wides on Monday before narrowing modestly. After adjusting for fundamental drivers, intermediate breakevens had appeared substantially rich versus fair value models in recent weeks, but when incorporating the April jump in realized core CPI inflation, breakevens now appear modestly cheap. This is not surprising, and we think breakevens will remain modestly cheap to our fair value estimates over the near term, as markets look through some of the recent strength in realized inflation. Along the curve, the 5Y/5Yx5Y breakeven curve remains near its most inverted levels, even after adjusting for the carry impact of the April CPI report. Upcoming CPI reports are expected to remain strong, as still-depressed travel-related components continue to normalize and supply chain disruptions continue to pressure goods prices. Last week, TIPS-focused ETFs recorded their largest weekly inflow since June 2020. We acknowledge the FOMC minutes released today, which suggest we could indeed see the Committee begin discussing adjustments to asset purchases at the June meeting, could weigh on demand somewhat going into tomorrow's supply process. Nonetheless, given the backup in real yields over the last couple of sessions, modestly cheap intermediate valuations, and a supportive fundamental backdrop, we think the 10-Year supply will be digested relatively smoothly."