Tuesday, 02 March, 2021
With so much focus on reflation narratives::
With so much focus on reflation narratives I found the below quote from a BIS report out last night pretty interesting. If you weren’t already questioning the move this year in breaks then this should atleast provide a healthy grain of salt to the move. It also provides some context as to why real yields could still push a lot higher from here in a number of different scenarios while counter to the theme over the last few weeks nominal yields would likely fall concurrently
“The overall increase in the break-even rate is likely to have reflected a variety of indications that US inflation could be higher in the near term. On the back of the Federal Reserve’s new monetary policy framework, progress in the distribution of vaccines, higher commodity prices and a potentially substantial fiscal impulse were likely drivers of higher inflation expectations. But what could have contributed to the high inflation risk premium[which is up 50bps since March 2020]?
…. From mid-2020, however, issuance of Treasuries picked up, with auction sizes increasing by between 20% and more than 50% by the end of 2020, depending on the tenor. At the same time, the auction sizes of TIPS remained stable. Since the Federal Reserve maintained a relatively large and steady pace of purchases that somewhat exceeded TIPS issuance but not the expanded issuance of Treasuries, the amount of Treasuries available to investors recovered quickly, while the corresponding TIPS volume stagnated.
This combination of higher supply of Treasuries and lower supply of TIPS is likely to have contributed to the higher measured inflation risk premium. To the extent that the appetite for inflation hedging remained constant or rose, which appears likely given the macroeconomic and policy backdrop, investors would bid down the yield on the limited amount of TIPS available. The relatively low liquidity of the TIPS market would amplify this effect”
——————————————————————————-
This message may contain confidential or privileged information. If you are not
the intended recipient, please advise us immediately and delete this message.
The unauthorised use, disclosure, distribution and/or copying of this e-mail or
any information it contains is prohibited.
This information is not, and should not be construed as, a recommendation,
solicitation or offer to buy or sell any securities or related financial
products. This information does not constitute investment advice, does not
constitute a personal recommendation and has been prepared without regard to
the individual financial circumstances, needs or objectives of persons who
receive it.
