TIPS Commentary

March 21st, 2017 5:53 pm | by John Jansen |

This is an interesting (to me) bit of commentary from ian Lyngen and Aaron Kohli at RBC. This is a amll excerpt from their end of day note:

The other big move on the day was the failed attempt by breakevens to improve and the fact that almost all major breakeven benchmarks (i.e. 5s and 10s), save the 30-year, cracked 2%. As seasonals and crude have both turned and the 10-year TIPS auction lies just ahead, we’re watching these levels because they could give us some sign of where market sentiment is ultimately headed.

Still at only around 2%, breakevens were reinforcing the broader narrative that the market may have started to pull a few chips off the reflation bet, but if Thursday’s vote results in failure for the passage of healthcare, we could see more material pressures show up in forward inflation expectations. Aside from political events, flows into TIPS have been very solid and we’d expect good sponsorship at high real yield levels and sub-2% breakevens at Thursday’s auction. To be clear, we do believe that the markets could eventually price out the reflation trade, but even if we start to see the market forecast the end of the Trump honeymoon with Congress, it could be some time before markets remove the risk of stimulus entirely and take Treasury yields much lower.

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