An hour ago I wrote,
In a few moments the Federal Reserve will buy TIPS. The breakeven spread on the 10 year is 136 currently which is 5 basis points richer than the late close yesterday. The 130/131 level is the level to which the recent 10 year auction tailed and should serve as support.
Dealers report active trading in the non TIPS market. I have heard of hedge funds selling the belly versus the wings. The same crowd has been buying 10s versus 2s.
There has been some modest 5 year buying from Europe and domestic real money has waded into the 30 year sector (small).
Maybe the Fed was making a statement about its expectations for future inflation as the Desk purchased a piddling amount ($ 1.5 billion ) of TIPS. The street had offered more than $ 15 billion.
I would suspect that with this operation complete that the street will gleefully begin to set up for the 5 year supply which will auction next week.
With inflation on a YOY level in the negative zone, the taxpayers will sell these on the cheap.
It appears that disappointment is coursing through the TIPS market. As I mentioned earlier the breakeven spread on 10 year TIPS was 135 basis points in the moments just prior to the Federal Reserve intervention. The spread closed last night at 130.
It has returned to the 130 level. I would suspect it gets cheaper as dealers probably are still lugging 10 year TIPS and will need to make room for 5 year TIPS. All of that in an environment in which (right or wrong) there is not a groundswell for inflation protection.