Short Run TIPS, LT Flat, Basically Awful Real(ity)

That’s a quick $220 billion above and beyond what was expected before the October 13 announcement.

The effect of bill supply on bill yields and therefore collateral constraints so far is…not large.

While certainly providing some level reprieve, the lack of further upward fluctuation in them might help us explain what else is going on further down the curve – and therefore the true picture of economic potential heading toward 2021’s finish.

This – along with real yields – is the story what’s missing from most commentary otherwise focused on TIPS and inflation. And even to the latter, while breakevens have indeed spiked since late September, near vertically in the 5-year, this obscures the behavior along the rest of that particular curve, too.

As has been the case all year, since January 8, the 5-year breakeven rate is “inverted” given how the 10-year breakeven drags.

The market is saying, quite emphatically, whatever the government will be forced to pay out in CPI protection (how TIPS are priced; basically, the lagging oil price effect on the CPI) this will remain firmly contained in the shorter run. To put the exclamation on it, the 5s over 10s inversion in terms of breakevens is now, by far, the most on record.

The nominal yield curve keeps flattening, today the difference between the nominal 5-year rate and that at the 10-year maturity sinking fast to just 38 bps. That’s the lowest since August 2020, when yields last reached their prior lows. The spread between the 2-year and 10-year dropped to just 104 bps.

That flattening in the nominal yield curve is actually and perfectly consistent with the upside down trading of TIPS breakevens as well as, if not more so, the same growing pessimism and rising deflation potential (outside the short-term) priced into the nominal side of TIPS.

The bond market moving in the direction of nominal growth and inflation would be more like it had been during 2013’s celebratory selloff; steepening curve with rapidly rising real rates.

These actions are not some “policy error”, either, especially given the small effect from the deluge of cash management bills. In other words, put it all together, bonds (globally) are saying the current “inflation” is still going to be transitory, if painful in gasoline prices along the way, and this is enough (it always seems to be) to convince the FOMC to turn “hawkish” despite the fact the underlying economy is absolutely nothing like what the Fed is modeling and the media keeps saying.

It is absolutely amazing the lengths people will go to in order to deny the most straightforward and obvious explanation; to torture and twist plain evidence. That’s the thing about rationalizing, though. The narrative usually matters more than the facts…If the world hadn’t been fooled into blindly following central bankers, to rationalize and make excuses for simple and straightforward facts, all anyone would’ve needed this whole time to perfectly understand the situation was Treasury rates and the yield curve.

With short run TIPS breakevens running wild, how can anyone say there’s a dollar shortage and dramatically rising deflationary potential right now? Easy, actually. The mountain of data and the repeating behavior of the (bond) market and curves has already spotted you the first nineteen letters.