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The Quiet Never Seems To Last


The 30y TIPS auction on Monday appeared to be sloppy. With a 2.229% clearing rate, the issue was priced considerably south of where the WI market had been priced at the bidding deadline. Dealers, leading into the auction, had reported thin customer books, and clearly ended up owning the issue.

But looks can be deceiving, and this is one ‘Dutch treat’ that really should be a treat. This sloppy bond, I think, will clean up nicely over the next few days into month-end and should be easy to distribute. Some investors probably shied away from the auction because it was the first of a new series (30y TIPS); some because the indices do not include the issue until month-end; and some because the February maturity is a first for a TIPS issue and, although the 30-year tenor tends to blunt the impact of seasonality investors cannot really know where the market will price Feb seasonality compared to the usual Jan, April, and July maturities.

(For the uninitiated: since TIPS settle to non-seasonally adjusted CPI-U, or NSA CPI for short, the pricing of the bonds reflects the relative advantage of receiving inflation compensation based on October/November prices (for January maturities) compared to January/February prices (for April maturities). Because consumer prices generally decline in December in the U.S., and because the final payment on a bond is based on final price index, principal redemptions in January are higher, all else equal, and April maturities trade at a discount to January maturities. But although derivatives folks can tell us where February maturities should trade, that is a far cry from telling us where they will trade since the bond market does not fully price seasonality).

But there are lots of customers who need long-dated inflation protection, and excepting a few old TIPS that trade relatively infrequently there was no source of long-dated inflation protection in the U.S. If this had been a 30y nominal issue, the long tail would have sent the market down hard as dealers scrambled to monetize their Dutch treat (also for the uninitiated: a “Dutch treat” is the result of the auction method the Treasury uses, which awards all bonds to bidders at the lowest price accepted, even if the actual bid placed by the auction participant was stronger. The difference between what a bidder was willing to pay and the actual award is termed a “Dutch treat” because this type of auction is also called a “Dutch auction”). But TIPS held up fine, and the auctioned issue closed around 2.20% so buyers went home with a profit.

Now, if it turns out that a few days pass and the distribution isn’t going so well for some reason, then the bond could fall out of bed but I suspect it will be quickly spoken for.

That was really the day’s main excitement. The 10y Note futures ended unchanged, and stocks -0.1%.

Tomorrow, the data calendar holds the S&P – Case/Shiller Home Price Index at 9:00 ET and the Consumer Confidence data (Consensus: 55.0 from 55.9) at 10:00. Neither of those is likely to be a major market mover. With less noise, perhaps we can discern the signal a little more clearly. Both upward and downward trends seem to be losing momentum in different time frames. That could spell a very boring day, or it could indicate multi-time-frame uncertainty, which can sometimes precede an explosive situation. Personally, I’m going with boring, but stay alert.

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