Traders are cautiously optimistic......>

US TSYS/TIPS: Traders are cautiously optimistic about the 1pm ET $14B 5Y TIPS

reopening auction. "We are relatively constructive on the 5-year TIPs auction

today," said Alex Li, head of U.S. rates strategy at Credit Agricole. "We think

the auction will meet demand from investment managers: it tends to be a large

liquidity event." 

- He noted the 5Y TIPS had been "trading tight in the repo" market, and was at

90 basis points through the Treasury General Collateral rate in recent trading.

"The auction will probably clean up the tightness in the repo," he added. 

- Li also said in 5Y TIPS auction favor that "breakevens and real yields are at

more attractive levels, then in the April 5Y TIPS auction. Customer demand has

been strong in recent auctions." 

- However he did warn of certain negative factors, such as that the "benign

(tame) inflation outlook that has been very well discussed by central banks and

market participants. And the TIPS carry will be turning negative,s tarting in

September, which usually means the weaker TIPS breakevens in the front end, then

the back end."