JPM See 30-Year TIPS Supply Being Digested Relatively Smoothly

J.P.Morgan note that Thursday will see “Treasury auction $8bn reopened 30-Year TIPS, in line with the last reopening auction. Since the February auction, 30-Year real yields have risen by 75bp and remain near their highest levels since May 2019. Meanwhile, 30-Year breakevens are only about 9bp wider since the February auction, after traversing a 65bp range over the last six months. Moreover, 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 still appear cheap. While our proxy of TIPS market depth remains depressed, it has risen off the lows in recent weeks, as realized breakeven volatility has subsided somewhat. However, we note that primary dealer holdings of TIPS have risen further in recent weeks to near their highest levels of the past 5 years, which might make it difficult for dealers to underwrite the supply. Nonetheless, with real yields near multi-year highs, breakeven valuations still somewhat cheap, and volatility subsiding somewhat in recent weeks, we think the supply will be digested relatively smoothly.”