Insights from the 10-Year TIPS Auction

The U.S. recently reopened 9-year, 10-month Treasury Inflation-Protected Securities (TIPS) and sold them at a yield of 1.734% plus inflation. This yield is lower than the previous auction’s yield of 1.985%. There was a significant tail of 4.6 basis points due to recent trends in the TIPS market. The bid-to-cover ratio was 2.020x, which is less than the average of 2.36x from the last six auctions. The auction highlighted some immediate weakness, shown by the large 4.6 basis point tail. The low bid-to-cover ratio of 2.02x, compared to the recent average of 2.36x, indicates buyers are hesitant at these levels. This suggests the market may have gotten ahead of itself after the recent rally. We should pay attention to the Federal Reserve’s likely actions next, as the market is now expecting a high chance of a rate cut before the end of the year. The August jobs report showed payroll growth slowing to just 98,000, and last week’s CPI figure confirmed core inflation has dropped to 3.1%, its lowest since 2023. This data supports the idea that the Fed will soon change direction, which could lower real yields significantly. For us, this signals an opportunity to make trades that benefit from falling real yields in the coming weeks. Buying call options on interest rate futures or a TIPS-focused ETF can provide a way to profit while managing risks associated with a dovish shift from the central bank.

Monitoring Breakeven Inflation Rate

It’s important to keep an eye on the breakeven inflation rate, which is currently about 2.4% for the 10-year. If the Fed cuts rates due to slowing growth, inflation expectations might decline, creating mixed signals for TIPS. The recent weak auction data provides a chance to enter the market before the easing cycle is fully priced in. This situation resembles late 2018, when the market anticipated the end of the Fed’s rate hikes before it became clear. Back then, being invested in duration trades proved very rewarding. The current scenario, showing weakening data after a period of high rates, suggests a similar opportunity is at hand. Create your live VT Markets account and start trading now.

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