TIPS Commentary

September 16th, 2015 9:49 am | by John Jansen |

Via an anonymous market maker:

A mixed bag. The headline and NSA print were right where the market was expecting, but it came about due to slightly firmer food inflation (+.235% month-on-month) while core inflation came in marginally softer with a cooling in OER, used cars, airfares, education and recreation.

On the whole, today’s print really only matters for the 2016s which need to be ~13bp and ~7bp cheaper in Jan and April, but that fails to account for the stealth 3% rise in gasoline futures which is happening at the moment.

Flows are just beginning to pick up, but if late yesterday is any guide, the off-the-runs 10y sector will remain reasonably supported and 30y TIPS will start to catch a bid as RYs creep higher. So far better buying across the curve from domestic RM and profit taking in 5y BEI from FM.

Big picture, it remains all about the Fed. If they elect to pass, I think it’s uniformly positive for real yields, in particular the 10y point.

Given the emphasis the Fed has placed on their expectation that inflation will return to trend, a pass tomorrow reflects a lack of confidence in this forecast. By extension, it means an increased risk of an eventual inflation overshoot as they seeminly wait until inflation is clear and present to move into traditional hiking mode. This should give owners of nominal securities pause and push them toward the security of real rates.

A hike tomorrow is not necessarily the converse. I think TIPS and BEIs will ultimately take their direction from the reaction of correlated assets which will feed through to auction appetite the next day. I think equities & ‘risk’ ultimately rally on a hike, but I get the sense I’m the outlier with this view. Even so, I’ll be watching other markets to get a sense for how to market make TIPS on Thursday afternoon.

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