What Is It About TIPS 5s Auctions? What Was It About *This* One?

By the time the Treasury schedule struck 5-year TIPS on April 17, 2014, there emerged huge demand for what was on deck. The results don’t really say much about it: of the $18 billion floated, there were $48 billion in overall bids and once again the indirects took the majority of it ($10.5 billion).

As you can see above, however, the price each accepted bidder was willing to pay was much better than the secondary market prices trading up to that date. This overwhelming demand spiked the 5-year breakeven rate (shorter run inflation expectation) in just the way you’d figure given the background narrative.

At that time, the federal government only sold one “true” 5-year TIPS bond per year but did reopen the auction twice more each calendar. The two in later 2014 were by contrast unremarkable, which is understandable given the collapse in rates, oil, and general attitudes about inflation and growth (in reality; the delusions of “transitory” deflationary factors would plague Janet Yellen and her companions at the Fed and in the media for quite some time more).

In fact, the next time we find even a modest reordering of expectations due to any TIPS auction was the next full note set off in April 2015 amidst some renewed optimism after the big oil/rate crash, dollar spike of the previous year. This time, it was much less than 2014’s and wouldn’t last very long (as Euro$ #3 ramped up instead into its more deflationary second act).

The 5-year TIPS auction in April 2016 was likewise unremarkable (just following the worst parts of Euro$ #3) so it wouldn’t be until the following year’s full offering that we see the deck reshuffled again. April 20, 2017, ended up being very 2014-like which was actually pretty consistent with the developing consensus as to globally synchronized growth.

Even though inflation expectations were falling at that time, the full TIPS 5s auction and the demand for what was sold suggested more optimism beyond that short run – which is where the market shifted just a few months later in September.

The second 2017 reopening in December was a small blip but again consistent followed by the full auction of TIPS 5s on April 19, 2018. Very much like 2017 and 2014, 2018 came out with heavier participants paying above-market premiums clearly boosting breakevens.

The April 2018 sale was conducted right as the dollar was starting its Euro$ #4 confirmation (surge), taking place about six weeks before the deflationary break in collateral on May 29 that year (and then the eurodollar curve inversion two weeks after that).

Unsurprisingly, by the time we get to the 2018 reopenings later on, there was no longer the same inflationary enthusiasm.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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