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

That Euro$ #4 inflation attitude continued into 2019, driven sideways by Jay Powell’s bewildered stance having been turned totally against him by the global bond market switching out his bird before he really realized it (from steadfastly hawkish to I-think-I’m-now-dovish-but-I-really-don’t-know-why).

April 2019 TIPS auction, therefore, another of the unremarkable variety again amidst growing recession “fears.”

That same year, the Treasury Department had reworked its auction schedule so that there would be two full TIPS auctions, leaving 2019’s second scheduled for October. By then, the market had shifted more reflationary/inflationary, and certainly that was the conventional view following first-rate cuts and then the Fed’s not-QE introduction just weeks before, as well as the yield curve having steepened (moving out of inversion) since the end of August.

As you can see above, the October 2019 full note TIPS 5s ended up very much like the full April 2014, April 2015, April 2017, and April 2018. Breakevens broke upward once the bids and prices were tallied and allocated.

There is a pattern here that has been pretty well established – an overall inflationary mood and outlook yields much better demand for the TIPS auctioned especially when it’s the full thing (not reopening).

Currently, we are amidst even greater fury and certitude than any of those prior, where the inflation narrative has become even more hysterically virulent than it had been in either 2014 or 2017-18. Given this, shouldn’t we have expected there to be the same kind of deck shuffling demand for the April 2021 TIPS auction?

That’s not what happened; on the contrary, for the first time, the auction shuffle produced the opposite reaction for inflation expectations. Whereas the uninteresting prior sales didn’t produce much of an effect in the secondary markets, and the inflationary ones spiked breakevens, this one went the other way tanking inflation expectations by 11 bps following it.

They’ve continued the same after today’s trading.

Everything in the world is supposed to be going the right way, big numbers globally from governments removing themselves from all limits of sanity and central bankers each egging everyone on in all possibilities. Vaccines, a clear pickup in recent economic conditions – not just in the US labor market or the US economy – and optimism, inflationary optimism being sung proudly and widely from every corner of every jurisdiction.

Maybe this 5-year TIPS auction result is a true anomaly, a trivial curiosity quickly forgotten once the market turns back more favorable. Then again, it is absolutely anomalous in that for any auction to have gone “poorly” this is the last one anyone would expect (because it is inflation-protected). The long 20-year bond sold with overwhelming demand just the day before. It’s more than a little weird to see here the first TIPS auction to have flipped around inflation expectations in this way.

And to have done so now of all these times.

This is not by any means a definitive sign or even a top-tier indication; it is, however, perhaps too-consistent of a reshuffle for a post-Feb 24-25-26 market.

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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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