Thursday, April 20, 2017

"5-Year TIPS Auction Fetches ‘Off the Charts’ Demand"

Someone may be thinking the reflation trade is back on. However...
The chart we posted to accompany this morning's Platts: "Why the crude rally has fizzled: Market analysis series":

Shows the year-over-year price comparisons are almost exactly flat and will soon go slightly negative meaning that what had been a slight inflation tailwind will become a slight headwind. Among other commodities we don't see any action in row crops until June-July when the extent of El Niño comes into better focus so the motivating factor for inflation probably comes down to labor compensation and that isn't exactly galloping ahead at the moment.

Don't get me wrong, TIPS are an amazingly versatile instrument but as an indicator we are not seeing it (yet).
interestingly, TIPS work just fine in disinflationary periods as they trade higher along with other treasuries.
As I said, versatile.

From Barron's Income Investing:
Traders were expecting a strong auction for five-year Treasury Inflation Protected Securities (TIPS) on Thursday, but what they got was a record-maker.

In a sign of strong demand from investors, bond dealers only bought 16.7% of the inventory, a record low by two percentage points, points out Thomas Simons of Jefferies. Indirect and direct bidders took the rest — both registering mult-year highs for their share of the issue.
Simons sees a technical reason for the demand:
There is a substantial index extension at the end of the month, so it appears that real money investors used the auction as a liquidity point. Dealers ended up with very little supply, but that was probably intentional. It doesn’t look like this will lead anyone to chase.
Aaron Kohli of BMO Capital Markets also didn’t think the strong auction was a reason to buy...MORE